Foreign Exchange Market in India:Single Currency Peg to Independent Floating-Devaluation All the Way

This paper analyses the development of foreign exchange system in India since 1948 in the backdrop of theoretical analysis. Whatever may be the foreign exchange system - single currency peg, managed float (single currency peg or basket peg), ‘hidden’ partial float, ‘partial’ float or independent floating of Rupee at current account - it is nothing but a new type of move towards depreciation of the Indian Rupee. The paper also analyses one-stroke, two-stroke or backdoor devaluation of the Indian Rupee at various times, which has no favourable impact on export, as commonly believed. At present, since floating of the Indian Rupee at current account under modified LERMS, in March 1993, there have been (i) depreciation of the Rupee and (ii) vanishing of implicit export tax leading to monetisation of fiscal deficit. It is theoretically argued that these, in turn, will lead to inflation and further devaluation, inflation and so on in the long run. Thus the ‘implicit’ export tax is being replaced by ‘inflation’ tax.