Exchange Rate Management is a policy framework and concept that a country uses to influence the value of its currency relative to others, aiming to maintain external stability and facilitate trade. India's current system is a managed float exchange rate regime, where the value of the Indian Rupee (INR) is primarily determined by market forces.
The modern framework originated from the economic liberalization of the early 1990s, with India officially moving to a market-determined exchange rate system in March 1993. This shift was necessitated by the need to integrate with the global economy and promote foreign investment. The legal basis is the Foreign Exchange Management Act (FEMA), 1999, which replaced the highly restrictive Foreign Exchange Regulation Act (FERA), 1973. FERA was enacted to conserve foreign exchange, which was considered a scarce resource, and treated violations as criminal offenses. FEMA, which came into force in June 2000, is management-oriented, treats violations as civil offenses, and aims to facilitate external trade and payments.
The mechanism works through the Reserve Bank of India (RBI), which is the custodian of the country's foreign exchange reserves and derives its authority from the RBI Act, 1934 and FEMA, 1999. The RBI intervenes in the foreign exchange market by buying or selling foreign currency, mainly US dollars, with the stated goal of "containing volatility" and preventing excessive appreciation or depreciation of the Rupee. This policy connects directly to the management of foreign exchange reserves and the tracking of the Real Effective Exchange Rate (REER) to assess the Rupee's trade competitiveness. The basic regime has remained a managed float since 1993, but the RBI's implementation has varied, including the use of spot-market operations and forward-book positions to manage market movements.