Question

Discuss briefly the foreign exchange reforms undertaken by the Government of India in the post 1991 period.

Hint:

Link foreign exchange reforms to 1991 crisis recovery—devaluation, convertibility, and FEMA improved external sector stability.

Answer 1

Post-1991, India undertook significant foreign exchange reforms as part of the broader liberalisation policy. The key reforms included:
Devaluation of Rupee: In 1991, India devalued its currency to promote exports by making Indian goods cheaper in global markets.
Market Determined Exchange Rate: India moved from a fixed exchange rate system to a market-determined exchange rate system. This allowed demand and supply to determine the value of the rupee.
Current Account Convertibility: Full convertibility was allowed on current account transactions (trade in goods and services), enhancing ease of doing international business.
Liberalisation of Capital Flows: Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) were encouraged by easing rules and raising limits in several sectors.
Establishment of Foreign Exchange Management Act (FEMA), 1999: FEMA replaced the restrictive Foreign Exchange Regulation Act (FERA) and provided a liberal and transparent legal framework for managing foreign exchange.
Growth in Forex Reserves: These reforms helped India build robust foreign exchange reserves, reducing its vulnerability to external shocks. These reforms made India’s external sector more resilient, competitive, and globally integrated.