Exchange Rate Management : The Indian Experience

India's exchange rate policy has evolved in line with international and domestic developments. Post-independence, in view of the prevailing Bretton Woods system, the Indian rupee was pegged to the pound sterling due to its historic links with Britain. A major development was the devaluation of the rupee by 36.5 per cent in June 1966. With the breakdown of the Bretton Woods system, and also the declining share of UK in India's trade the rupee was delinked from the pound sterling in September 1975. During the period between 1975 to 1992, the exchange rate of the rupee was officially determined by the Reserve Bank within a nominal band of plus or minus 5 per cent of the weighted basket of currencies of India's major trading partners. The Reserve Bank intervened on a day-to-day basis which resulted in wide changes in the size of reserves. The exchange rate regime of this period can be described as an adjustable nominal peg with a band.

The beginning of 1990s saw significant rise in oil prices and suspension of remittances from the Gulf region in the wake of the Gulf crisis. This and other domestic and International developments, led to severe balance of payments problems in India. The drying up of access to commercial banks and short-tern credit made financing the current account deficit difficult. India's foreign currency reserves fell rapidly from US S 3.1 billion in August to US S 975 million on July 12, 1991.

In September 1975, The Indian rupee was delinked from the Britain's Pound Sterling, due to :

Decline in India's Trade with United Kingdom

The correct answer is option (2) : Decline in India's Trade with United Kingdom

The main reasons for delinking the rupee from the pound sterling were the breakdown of the Bretton Woods system and the declining significance of the UK in India's trade.