Exchange Rate Trends and Management in India
This paper evaluates developments in India’s nominal and real exchange rates over the past two decades, describing longer term trends as well as short-term movements and volatility. In addition, we evaluate the motivation and impact of exchange rate policy in India, including its interaction with domestic monetary policy. We find substantial divergences between nominal and real exchange rate trends, and between Indian multilateral and bilateral Rupee-USD longer-term exchange rate movements. Beyond long-term trends, Rupee exchange rate movements and volatility have evolved through several distinct episodes. In particular, exchange rate volatility increased markedly from the mid-2000s, especially since the Global Financial Crisis. The RBI used foreign exchange market intervention and an active capital control policy to influence the level and limit volatility of the exchange rate, an official policy objective. However, these policies have had limited effect on the exchange rate. Against a background of a trend increase in financial openness and, perhaps most importantly, increasing external shocks, the RBI appears to have accepted more instability in the exchange rate in favor of greater monetary independence. Since the GFC , however, greater monetary independence seems to have focused more on stimulating growth and employment rather than low inflation. Only since 2014 has the RBI focused on low inflation as a primary domestic objective.
KeywordsExchange Rate Monetary Policy Real Exchange Rate Purchasing Power Parity Foreign Exchange Market
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