History of Forex Market in India

Until 1993, India maintained an administrative exchange rate. From its independence from the British to 1971, India had a fixed exchange rate against the currency of its former rulers. This was however done in consultation with the International Monetary Fund. After the collapse of the fixed exchange rate system in 1971, the currency was linked to the British pound, but not for long. As other economies gained prominence in India’s economic relations, there was a need to maintain stability vis-à-vis with other currencies too. 1975 onwards, the Indian rupee was linked to a basket of currencies and was devalued from time to time in order to maintain stability. Following India’s economic liberalisation in 1991, the currency was devalued by 18% and administered exchange rate lived side by side the market too. Also, the Indian currency began being quoted against the U.S. dollar – a change from its pound based quote. It was only in 1993, that the rupee was made to float. The Indian currency was now tradable in the market.

The Foreign Exchange Market

India’s forex market is a multi-tiered market where the commercial banks that quote the domestic unit against the US dollar, are at the centre of activity. The rupee is not quoted against any other currency in this rate discovering market. Businesses that need to transact in foreign currency, do so with an authorised dealer (generally a commercial bank) as they are not permitted to deal directly with each other.

In general, the rupee’s exchange rate is characterised by stability against the dollar followed by a sharp depreciation ranging from 2% to 7%. However, if one takes into account inflation and the movement of other major currencies like the yen, mark and the pound, the domestic currency has been nearly stable in the past seven years. The central bank comes in from time to time in the market to buy or to sell dollars in order to stabilise the market, which it does successfully. The central bank is also sometimes nearly absent from the market, even during a movement.