India’s Exchange Rate Regime Under Inflation Targeting

Abstract

While the basic exchange rate regime has stayed the same since the liberalising reforms of the 90s, its implementation has varied over the years. The article assesses the evolution of India’s nominal exchange rate regime and its suitability under inflation targeting. It also examines the evolving impact on trade, inflation, currency and financial markets, country risk premium and the cost of borrowing. The analysis suggests a flexible exchange rate with intervention to prevent excess volatility as well as misalignment from competitive real exchange rates, while allowing some volatility to aid price discovery in foreign exchange markets, would work best in inflation targeting emerging markets.

JEL Codes: F41, F31, E52

Keywords

India exchange rate regime capital flows inflation targeting

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