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

Following 1991, India implemented significant foreign exchange reforms as part of its broader liberalization policy. Key reforms included:
Rupee Devaluation: In 1991, India devalued its currency to boost exports by making Indian goods more affordable internationally.
Market-Driven Exchange Rate: India transitioned from a fixed to a market-determined exchange rate system, allowing supply and demand to dictate the rupee's value.
Current Account Convertibility: Full convertibility was introduced for current account transactions (goods and services trade), facilitating international business.
Easing Capital Inflows: Rules were relaxed and limits raised across various sectors to encourage Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII).
Foreign Exchange Management Act (FEMA), 1999: FEMA superseded the restrictive Foreign Exchange Regulation Act (FERA), establishing a more liberal and transparent legal framework for foreign exchange management.
Increased Forex Reserves: These reforms contributed to substantial growth in India's foreign exchange reserves, enhancing its resilience to external economic shocks. These reforms strengthened India's external sector, making it more competitive, globally integrated, and resilient.