Has the exchange rate regime changed for the worse?
Business Standard|October 29, 2024

Over the past few years, the Reserve Bank of India (RBI) has radically altered the nation's exchange rate policy, shifting from a relatively flexible regime to an inflexible one.

JOSH FELMAN & ARVIND SUBRAMANIAN
Has the exchange rate regime changed for the worse?

Over the past few years, the Reserve Bank of India (RBI) has radically altered the nation's exchange rate policy, shifting from a relatively flexible regime to an inflexible one. This change has been noted by a few commentators, including K.P. Krishnan and Sajjid Chinoy. But by and large it has not received the attention it merits.

This is unfortunate, since the shift has had important implications for the nation's competitiveness, its export performance, economic growth, and external resilience. Consider how.

To understand the radical nature of the current regime, we first need to grasp the policy that long preceded it. Ever since the liberalization in 1991, the RBI has pursued a flexible exchange rate policy.

It never allowed the rate to float completely freely. But it did allow the rate to move as needed.

Essentially, the RBI pursued a three-pronged strategy: (i) Allowing depreciation when capital outflows put downward pressures on the rupee; (ii) allowing appreciation when particularly rapid export and productivity growth created upwards pressure; and (iii) building up reserves during episodes of strong capital inflows.

This policy had two important advantages. First, it allowed the exchange rate to respond to cyclical market forces. This is apparent from Figure 1, which shows developments in the real effective exchange rate, that is, the rate adjusted for differences in inflation between India and its trading partners. One can see that the rate appreciated by 16 percent during the boom from 2002 to 2011, thereby dampening the excess demand and inflation that emerged during this period.

This story is from the October 29, 2024 edition of Business Standard.

Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 9,000+ magazines and newspapers.

This story is from the October 29, 2024 edition of Business Standard.

Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 9,000+ magazines and newspapers.

MORE STORIES FROM BUSINESS STANDARDView All
Pioneer of parallel cinema dies at 90
Business Standard

Pioneer of parallel cinema dies at 90

Veteran filmmaker Shyam Benegal, who heralded the Indian parallel cinema movement in the 1970s and 1980s with films such as Ankur, Nishant and Manthan, died on Monday, his daughter Pia said. He was 90.

time-read
2 mins  |
December 24, 2024
How tech is changing the landscape of elder care
Business Standard

How tech is changing the landscape of elder care

The concluding part of the silver economy series looks at innovative apps and wearables that are empowering seniors and their families

time-read
2 mins  |
December 24, 2024
ALGO RHYTHM AND BLUES
Business Standard

ALGO RHYTHM AND BLUES

Can Sebi's draft rules on algorithm-based trading level the playing field between institutional and non-institutional investors?

time-read
4 mins  |
December 24, 2024
Business Standard

AVOIDING MIS-SELLING BY MF DISTRIBUTORS Say no to NFOs, buy direct plans and seek advice from Sebi RIAs

The Securities and Exchange Board of India (Sebi) has implemented a new rule to curb unnecessary portfolio churn by distributors, usually done during the launch of new fund offers (NFOs) to pocket higher commissions.

time-read
2 mins  |
December 24, 2024
Amber Enterprises posts sharpest rise in 2 mths
Business Standard

Amber Enterprises posts sharpest rise in 2 mths

13% gains driven by block deal in which 1% equity changed hands

time-read
2 mins  |
December 24, 2024
Business Standard

NEW LISTINGS ADD 3% TO INDIA'S MCAP IN 2024

New listings through initial public offerings (IPOs) in 2024 contributed nearly 3 per cent (₹14 trillion) to India's market capitalisation, surpassing last year's contribution of 1.4 per cent (₹5 trillion).

time-read
1 min  |
December 24, 2024
Business Standard

Weak management commentary weighs on Siemens stock

Siemens's share price has lost ground in the past few sessions following weak management commentary.

time-read
2 mins  |
December 24, 2024
Business Standard

Mkts stage sharp recovery after five days of fall

Equity benchmark indices Sensex and Nifty rebounded sharply on Monday after five days of steep decline amid value buying at lower levels and a rally in global markets.

time-read
1 min  |
December 24, 2024
Business Standard

Public offers see investor rush

The five initial public offerings (IPOs) that closed on Monday attracted cumulative bids worth ₹1.4 trillion against ₹2,909 crore they were looking to raise. These offerings were subscribed between 11 and 195 times.

time-read
1 min  |
December 24, 2024
Zomato pips Maruti, HUL in Sensex weight
Business Standard

Zomato pips Maruti, HUL in Sensex weight

Becomes first new-age firm to join 30-share benchmark

time-read
1 min  |
December 24, 2024