[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
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REIMAGINING INDIA<br />
Figure 3: Post-reform Exchange Rate Variability<br />
Prior to 1991, the exchange rate regime<br />
in India, was pegged to a currency <strong>The</strong> plots show the nominal exchange<br />
the currency.<br />
basket. Hence India had a fixed rate rate remained almost stable during the<br />
regime. Figure 1 plots the exchange rate two decades of the 1970’s and 1980’s.<br />
and its annual change, for rupee from <strong>The</strong> rate of change moved in a band of<br />
1970 to 1990. A positive change +/- 6 percent in the 1970’s except for<br />
indicates depreciation and a negative<br />
change indicates appreciation of percent due to the oil price<br />
1979 when the rupee depreciated by 10<br />
shock.<br />
During the 1991 financial crisis, faced<br />
with very low forex reserves the government<br />
floated the rupee, though the<br />
transition was gradual. Between 1991-<br />
93 there was a dual exchange rate regime<br />
and the rupee was subsequently<br />
floated in early 1993. International experience<br />
has shown exchange rate variability<br />
increases with a change to a<br />
more flexible rate regime. This has not<br />
been the case for India even after a decade<br />
of a floating rate regime as evident<br />
from the Figure 2 which plots the real<br />
effective exchange rate for the rupee<br />
from 1993-2002. This is essentially because<br />
a stable exchange rate remains an<br />
important objective of government exchange<br />
rate policy. Saggar (1999) notes<br />
the RBI’s intervention (measured by<br />
changes in foreign reserves) has in fact<br />
increased in the post 1993 period.<br />
<strong>The</strong> central bank has used both direct<br />
and indirect methods of market<br />
intervention. 5 <strong>The</strong> main objective of<br />
government policy is to keep the exchange<br />
rate aligned with the fundamentals<br />
of the economy like inflation. Thus<br />
the exchange rate depreciated by 1.5<br />
percent in September 1997 and the<br />
speed of depreciation was moderated<br />
by intervention sales by the RBI. In the<br />
central banks’ own words “...the conduct<br />
of exchange rate policy was guided<br />
by the need to maintain a delicate balance<br />
between the considerations of external<br />
competitiveness and price stability”<br />
(RBI, 1997, page I-9). This is also<br />
confirmed by analyzing the standard<br />
deviation of the rate of change in exchange<br />
rates, a measure of variability<br />
of the exchange rate. <strong>The</strong> standard deviation<br />
was 4.7 from 1970-80, 4.6 from<br />
1980-90 and 4.7 from 1993-2003. This<br />
122 THE <strong>IIPM</strong> THINK TANK