At a glance
From a fixed peg to a market-driven rate
Today’s regime
Managed float — market-driven, with RBI stepping in sometimes.
Big devaluations
1966 and 1991, both under serious economic pressure.
Unified market rate
Since 1 March 1993, one rate, not two.
Who steps in
The RBI, to smooth out sharp swings.
On this page
What an exchange rate regime actually is
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.
Remember: India’s exchange rate is not fixed today. The RBI does not set a target number. It only smooths out sudden, disorderly moves.
Q1. True or False: India’s rupee currently trades at a fixed rate set by the RBI.
The 1966 devaluation
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.
Q2. True or False: The 1966 devaluation was politically unpopular and made India more cautious about currency policy afterward.
1991: a real balance-of-payments crisis
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.
1991
Crisis, two-stage devaluation
1992-93: LERMS
Dual rate — 40% official, 60% market
1 March 1993
Unified into one market-determined 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.
Q3. True or False: Under LERMS, exporters converted part of their earnings at a government rate, and the rest at the market rate.
Today’s system: a managed float
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.
The distinction examiners keep testing
Exchange rate questions tend to test three specific mix-ups:
- 1966 vs. 1991: both were devaluations, but 1966 was a single sharp cut. 1991 was two smaller cuts, followed by a full system change (LERMS, then a unified market rate).
- Devaluation vs. depreciation: devaluation is a deliberate official act, under a fixed or pegged system. Depreciation is a market-driven fall in value, under a floating system — today’s rupee depreciates, it isn’t devalued.
- Managed float vs. free float: India’s RBI does intervene sometimes, unlike a true free float with zero central bank involvement.
The rupee’s recent pressure
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.
[Data] In the week ended 16 October 2026, reserves fell by $5 billion to $721 billion. Foreign currency assets dropped $5.7 billion to $591.8 billion. Gold rose $706 million to $105.8 billion. Reserves are now about $8 billion below the August record. (Source: Akashvani News)
Reserves are the RBI’s shield. In the week ended 21 August 2026, they hit a record $729.3 billion. Foreign currency assets made up $591.3 billion and gold $114.2 billion. (Source: Akashvani News)
Figures current as of October 2026 — exchange-rate levels move daily, so re-verify the latest rate and reserve figures before citing them.
Quick Q&A
What exchange rate system does India use today?
A managed float — mostly market-determined, with the RBI stepping in only to smooth sharp swings.
What was LERMS?
The Liberalised Exchange Rate Management System, a 1992-93 dual-rate bridge before India unified to a single market rate in 1993.
What’s the difference between devaluation and depreciation?
Devaluation is a deliberate official cut under a fixed-rate system. Depreciation is a market-driven fall under a floating system.
When did India move to a fully unified, market-determined exchange rate?
1 March 1993, ending the dual-rate LERMS system.
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