Evolution of India's exchange rate regime

Ashima Goyal

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: The paper analyzes the changing INR trends over the reform period, in the context of fundamental determinants of exchange rates. In the early reform years the chief concern was to limit appreciation from inflows, and from higher domestic inflation, given the trade deficit. So short-term nominal depreciation maintained a long-term real fix. But with two-way nominal variation, more objectives can be accommodated. We ask how the exchange rate contributed to three possible policy objectives-maintaining a real competitive exchange rate, neutralizing inflationary oil shocks, deepening foreign exchange markets and encouraging hedging. Depreciation allowed just before oil prices crashed compromised the second objective. Inadequate commitment to two-way movement, prior to the crisis, induced firms to take large currency exposures based on expected appreciation. After the crisis, capital flows were allowed to drive the exchange rate, aggravating inflation and acting against macro stabilization. Markets need some guidance to achieve policy objectives.

Keywords: Exchange rate regimes; stabilization; inflation; markets; capital flows; hedging (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010-12
New Economics Papers: this item is included in nep-cis and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2010-024

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