Examine the methods used by the government to control the exchange rate regime, including the Reserve Bank of India’s (RBI) interventions in the foreign exchange market, and their effects on the stability of the external sector, the competitiveness of Indian exports, and the macroeconomic climate as a whole.
Ans: With the evolving Indian economy , the Indian government’s strategies along with RBI to manage the exchange rate regime are crucial for maintaining economic stability and enhance competitiveness. It intervenes as and when required through various measures as follows:
1. Interventions by the RBI in the Foreign exchange market:
a) BUYING/SELLING foreign currency:– During advancing depreciation of Rupees , RBI tends to absorb rupee or injects dollar in the market to stabilize the foreign exchange rate equilibrium.
b) Sterilization operation:- To ensure sustainable Foreign exchange rate, RBI squeeze liquidity from the market by using efficient tools like issuing government securities.
2. Export:-
a) Depreciation of INR tends to make export cheaper in foreign market, thereby enhancing competitiveness and price discovery for exporters which narrows our current account deficit.
b) Price stability:- effective exchange rate management helps control inflation, that can erode competitiveness by increasing production cost.
3. Effect on external sector:-
a) A stable exchange rate supports a balanced current account by preventing large surpluses or deficits.
b) Attracts foreign investment , both FDI and FPI.
c) A stable rupee ensures predictable debt serviceability.
4. Macroeconomic effect:–
a) Confidence building among investor and consumer for sustained economic growth.
b) A sustained equilibrium between domestic and international currency rate also enhances stability and resilience in the financial sector of the country.
In the realm of globalized financial framework maintaining a stable foreign exchange market is prerequisite to ensure an efficient and sustainable growth momentum of the economy
Assessment of Government Strategies to Manage the Exchange Rate Regime
1. Reserve Bank of India (RBI) Interventions in the Foreign Exchange Market:
2. Impact on the Competitiveness of Indian Exports:
3. Impact on the Stability of the External Sector:
4. Impact on the Overall Macroeconomic Environment:
Government Strategies and Recent Examples
1. Use of Foreign Exchange Reserves:
2. Policy Coordination:
Conclusion
The government’s strategies to manage the exchange rate regime, supported by the RBI’s interventions, have a significant impact on the competitiveness of Indian exports, the stability of the external sector, and the overall macroeconomic environment. While RBI’s direct market interventions and foreign exchange reserves management have provided stability, challenges such as inflationary pressures and external shocks remain. Continuous adjustments and strategic coordination between monetary and fiscal policies are essential for maintaining balance and fostering economic stability.