Exchange Rate Trends and Management in India

  • Michael M. Hutchison
  • Gurnain Kaur Pasricha


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.


Exchange Rate Monetary Policy Real Exchange Rate Purchasing Power Parity Foreign Exchange Market 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Aizenman, J., Chinn, M., & Ito, H. (2008). Assessing the emerging global financial architecture: measuring the trilemma’s configurations over time, National Bureau of Economic Research Working Paper 14533.Google Scholar
  2. Hutchison, M., Pasricha, G., & Singh, N. (2012a). Effectiveness of capital controls in india: evidence from offshore NDF market. IMF Economic Review, 60(3), 395–438.Google Scholar
  3. Hutchison, M., Pasricha, G., & Singh, N. (2012b). Indian capital control liberalization: estimates from NDF markets. IMF Economic Review, 60(3), 395–438.Google Scholar
  4. Hutchison, M., Sengupta, R., & Singh, N. (2012b). India’s trilemma: financial liberalization, exchange rates and monetary policy. The World Economy, 35(1), 3–18. January.CrossRefGoogle Scholar
  5. Hutchison, M., Sengupta, R., & Singh, N. (2013). Dove or Hawk: characterizing monetary policy regime switches in india. Emerging Markets Review, 16, 183–202.CrossRefGoogle Scholar
  6. India IMF Article IV Consultation (2013).
  7. India IMF Article IV Consultation (2015).
  8. Khan, H.R. (2011). The shrinking money and Reserve Bank of India’s monetary policy. Speech at the 10th National Management Seminar—2011 on The shrinking money: combating debt crisis and inflation, organized by The Asian School of Business Management, Bhubaneswar, 10 December 2011.Google Scholar
  9. Lane, P. R., & Milesi-Ferretti, G. M. (2007). The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004. Journal of International Economics, 73, 223–250. November.CrossRefGoogle Scholar
  10. MacKinnon, J. G. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11(6), 601–618. November–December. Wiley.Google Scholar
  11. Pandey, R., Pasricha, G.K., Patnaik, I., & Shah, A. (2015). Motivations for capital controls and their effectiveness, Working Paper 2015-5.Google Scholar
  12. Pasricha, G.K., Falagiarda, M., Bijsterbosch, M., & Aizenman, J. (2015). Domestic and multilateral effects of capital controls in emerging markets, (with Matteo Falagiarda, Martin Bijsterbosch and Joshua Aizenman), NBER Working Paper No. 20822, January 2015.Google Scholar
  13. Reserve Bank of India (2013). Intervention in the Foreign Exchange Markets: the approach of the reserve bank of India, remarks prepared for Emerging Markets Deputy Governors‘ Meeting, hosted by the BIS.
  14. Reserve Bank of India (2014). RBI Bulletin, April 2014.
  15. Sahay, R., Arora, V., Arvanitis, T., Faruqee, H., N’Diaye, P., Mancini-Griffoli, T. & an IMF Team (2014). Emerging market volatility: lessons from the taper tantrum. IMF staff discussion note, SDN/14/09, September 2014.Google Scholar

Copyright information

© Springer India 2016

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of CaliforniaSanta CruzUSA
  2. 2.International Economic Analysis DepartmentBank of CanadaOttawaCanada

Personalised recommendations