India’s Exchange Rate Regime

Three broad choices, for any country

Every country must pick a way to set its currency’s value. There are three broad choices. A fixed rate ties the currency to another, like gold or the US dollar. A floating rate lets markets decide it freely. A managed float sits in between.

India has moved through all three approaches since independence. Its currency started pegged to the British pound. Today, it floats, with the RBI stepping in only sometimes.

Worked example: Think of a fixed rate like a shop with a printed price tag. A floating rate is like an auction, where the price changes with every bid. A managed float is an auction where an organiser occasionally steps in, to stop the price from swinging too wildly in one day.

A politically costly early lesson

In June 1966, India devalued the rupee sharply. Estimates of the exact size vary, but it was a large cut, well above 30%. The move came under pressure from international lenders, after a period of war spending and poor harvests strained India’s finances.

The devaluation was deeply unpopular at home. It was widely seen as a political setback. It shaped India’s caution around currency policy for decades afterward.

Devaluation, then a genuine regime change

In 1991, India faced a severe crisis. Foreign currency reserves fell dangerously low. The government devalued the rupee twice within three days, on 1 and 3 July, by about 9% and 11%.

This time, devaluation was just the start. In 1992-93, India introduced the Liberalised Exchange Rate Management System (LERMS). Under LERMS, exporters had to sell 40% of their foreign earnings at an official rate. The remaining 60% could be converted at the market rate.

Worked example: Imagine an exporter earning $100. Under LERMS, they had to convert $40 at a government-set rate — often less favourable. They could convert the other $60 at whatever the open market offered. This dual system was messy by design. It was a deliberate bridge, not a permanent solution.

One rate, mostly market-driven, since 1993

On 1 March 1993, India unified its dual exchange rate into a single, market-determined rate. That basic system still holds today. The rupee’s value moves daily, based on trade flows, investment, and global sentiment.

The RBI does not fix a target level. It intervenes only to prevent sharp, disorderly swings, buying or selling dollars from its forex reserves as needed.

A record low, and active RBI defence

In May 2026, the rupee touched a record low against the US dollar, close to 97. The RBI actively intervened, selling dollars to slow the fall.

India’s forex reserves have also moved sharply in recent weeks, as the RBI keeps defending the rupee against renewed pressure.

Figures current as of September 2026 — exchange-rate levels move daily, so re-verify the latest rate and reserve figures before citing them.