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Table of Contents
Overview of Forex policy over the years ...........................................................................2
BIBLIOGRAPHY .................................................................................................................. 5
Summary Statistics
Number of Pages: 3
Number of Graphs: 1
Independence ushered in a complex web of controls for all external transactions through
a legislation i.e., Foreign Exchange Regulation Act (FERA), 1947. There were further
amendments made to the FERA in 1973 where the regulation was intensified. The policy
was designed around the need to conserve Foreign Exchange Reserves for essential
imports such as Petroleum goods and food grains.
The year 1991 was an important milestone for the Economy. There was a paradigm shift in
the Foreign Exchange Policy. It moved from an Import Substitution strategy to Export
Promotion with sufficient Foreign Exchange Reserves. The adequacy of the Reserves was
1
determined by the Guidotti Rule , though the actual implementation of the rule was
modified to meet our requirements.
In the 1990s, consistent with the general philosophy of economic reforms a sea change
relating to the broad approach to reform in the external sector took place. The Report of
the High Level Committee on Balance of Payments (Chairman: Dr. C. Rangarajan, 1993)
set the broad agenda in this regard. The Committee recommended the following:
1 The Guidotti Rule says that Usable foreign exchange reserves should exceed the
scheduled amortization of foreign currency debts during the following 12 months.
However this was amended to meet the Indian requirement
2 Source: Reserve Bank of India Weekly Statistics Publication (16th Nov 2007)
Globalization of the world economy is a reality that makes opening up of the capital
account and integration with global economy an unavoidable process. Today capital
account liberalization is not a choice. The capital account liberalization primarily aims at
liberalizing controls that hinder the international integration and diversification of
domestic savings in a portfolio of home assets and foreign assets and allows agents to
reap the advantages of diversification of assets in the financial and real sector. However,
the benefits of capital mobility come with certain risks which should be categorized and
managed through a combination of administrative measures, gradual opening up of
prudential restrictions and safeguards to contain these risks.
URRENT SCENARIO
CURRENT
The main objectives in managing a stock of reserves for any developing country, including
India, are preserving their long-term value in terms of purchasing power over goods and
services, and minimizing risk and volatility in returns. After the East Asian crises of 1997,
India has followed a policy to build higher levels of Foreign Exchange Reserves that take
into account not only anticipated current account deficits but also liquidity at risk arising
from unanticipated capital movements. Accordingly, the primary objectives of
maintaining Foreign Exchange Reserves in India are safety and liquidity; maximizing
returns is considered secondary. In India, reserves are held for precautionary and
transaction motives to provide confidence to the markets, both domestic and external,
those foreign obligations can always be met.
The Reserve Bank of India (RBI), in consultation with the Government of India,
currently manages Foreign Exchange Reserves.. As the objectives of reserve
management are liquidity and safety, attention is paid to the currency
composition and duration of investment, so that a significant proportion can be
converted into cash at short notice.
7 ; 3%
47 ; 24%
53 ; 27%
92 ; 46%
BIBLIOGRAPHY
Websites
http://rbi.org.in
http://mospi.gov.in
http://imf.org
http://treasury.worldbank.org
Publications
Databases
CMIE
RBI Database (link from http://rbi.org.in)
CSO Database on Foreign Exchange Reserves