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Exchange rate is one of the important variables which determines country’s relative level of health. Economic and financial integration of world economies and growth in world trade increased the importance of exchange rate. A country’s exchange rate provides information about its economic condition as well. With the help of exchange rate, prices of goods and services can be compared in different economies. Involvement of different currencies in international transactions creates exchange rate problem. Therefore, it is a most debatable word in modern globalised economy. Exchange rate is very dynamic concept and it may changes on daily basis. By altering the relative prices of goods and services and of capital, changes in exchange rate affects trade and capital flow among countries. Minor change in exchange rate can have large effect on country’s trade and capital flow. Therefore, it is constantly watched and analyzed by economic agents for their international businesses and policy makers to maintain appropriate level of exchange rate for external as well as internal balance for country.

Prior to the First World War (1870 – 1914), Gold Standard was completely functional as International Monetary System. Gold Standard was fixed exchange rate system in which gold was reserve asset and exchange rate between currencies determined according to fixed amount of gold content in currencies decided by Government in concerning countries. This was known as mint parity. Gold Standard allowed some fluctuations in exchange rate within gold points (gold export and import points). These gold points were determined by shipping cost of gold between monetary centers and within these gold points, exchange rate determined by demand and supply of gold. Under this system country money supply was linked to their gold reserves. Therefore, change in countries gold reserve affected its money supply and consequently its price level as well. As for as Balance of Payment (BOP) was concerned, free flow of gold between countries provide Automatic Adjustment through changes in price level in concerning countries. With the outbreak of the World War ɪ (1914 -1918), many countries suspended their currency convertibility into gold and imposed restriction on export and import of gold. As a result, Ist inning of Gold Standard ended. After the war, countries like United States (US) and Britain tried to revive the Gold Standard in 1919 and 1925 respectively by reintroducing their currencies convertibility into gold at the prewar price and eliminating restrictions on gold export - import. Other countries also followed US and UK. Thus Gold Standard again came back in 1927[1] with very short innings. But the global economic conditions like hyperinflation in Germany in 1920s and worldwide depression caused by collapse of US stock market in 1929 prevented the restoration of Gold Standard. Gold demand by France for its BOP surplus with UK caused UK gold reserves to decline and consequently UK suspended pound – gold convertibility in 1931. After abandoning dollar – gold convertibility by US in 1933 Gold Standard completely collapsed.

During the interwar period, there had been huge volatility in exchange rate experienced and currencies were exchange at floating rates. There was Autarkic situation prevailed in the world economy. Specially during 1933 – 1944, there was no Exchange Rate System, currencies were exchanged at floating rates and world economy in chaotic condition. To encourage International Monetary cooperation and Trade relations between countries delegation of 44 nations including US and UK met at Bretton Woods, New Hampshire  amid the Second War ɪɪ, in July 1944. The new International Monetary System that emerged was Bretton Woods System (BWS). The system created two important institutions: International Monetary Fund (IMF) which organize International Monetary relations and regulate the system and was based on two pillars: exchange rate stability and provision of short run credit for countries for their BOP problems; and International Bank for Reconstruction and Development (IBRD) which was responsible for providing financial aid for reconstruction of devasted countries in World War II and economic development for Less Developed Countries. The Bretton Woods System reflected in the American delegation plan which was drawn up by Harry Dexter White. Bretton Woods System was Gold Exchange System which introduced fixed exchange rate system. At the end of World War II, US monetary gold reserves was 75 % of total global gold reserves and also accounted for half of the global gold market as well. Therefore, to provide confidence in the system, United States (US) pegged dollar to gold at 35 dollar per ounce and agreed to convert dollar into gold at that price without any restriction. Other member countries also agreed to pegged their currencies to US dollar. Though, Bretten Woods System was fixed exchange rate system, yet it allowed member countries to adjust in their currency value within +/- 1 percent of agreed value. By using dollar, countries intervene in foreign exchange market to prevent appreciation or depreciation of its domestic currency beyond +/- 1 % of agreed value. Thus under this system, US dollar played major role and worked as international currency. Because dollar holdings earned interest but gold not, countries tried to hold dollar for their international reserves rather than gold and it was felt that dollar was better than gold. In the case of large and persistent BOP situation member countries can change their exchange rates less than 10 percent of agreed value without IMF approval whereas beyond 10 percent of agreed value required the IMF approval.

During 1945 – 1949 US experienced surplus in its BOP with European countries and continued its plan aid for their reconstruction. As long as European recovery completed by 1950 surplus of US BOP turned into deficit, yet, till 1957 deficit was in small figure, it increased thereafter sharply and high rate of inflation caused by Vietnam war (1955 – 1975) also fueled US deficit by making US goods less competitive in global market. Accumulation of dollar by surplus countries and US financing of its deficits in dollar created dollar shortage as well as declined in US gold reserves. Decline in US gold reserves and rise in foreign dollar holdings created severe challenge to dollar stability. By 1970, US gold reserves was four times less than foreign dollar holdings which led US to convince surplus nations (West Germany and Japan ) to revalue their currencies. After failed to convinced surplus nations, it was expected that US devalue dollar against gold very soon. All these developments forced US to suspend gold – dollar convertibility. In August 1971 Nixon government suspended gold – dollar convertibility ( Nixon shock ) and also imposed 10 % of temporary surcharge on import.

After the suspension of gold- dollar convertibility by the Nixon government in 1971 (Nixon shock) Bretton Woods System ended and floating exchange rate adopted by many developed countries[2]. Initially floating exchange rate adopted by countries central bank was only temporary development until new system established. In order to revive Bretton Woods System at new par value, Smithsonian Agreement held on December 1971. According to this agreement US devalued dollar about 9 % against gold and dollar price of gold increased from 35 dollar per ounce to 38 dollar per ounce. Smithsonian Agreement also raised the adjustable limit of currencies values from +/- 1% to +/- 2.25% at new agreed par value. But, again in effort to come out its adverse BOP situation of 1972 about 10 % devaluation of dollar against gold in 1973 and increased speculation against dollar led industrially developed countries to adopt floating exchange rate.

In November 1975, major industrial countries met at Rambouillet (France) and agreed to amend the article ɪv of the IMF (Article of Agreement), to allow nations to adopt any Exchange Rate System. Finally, IMF members formally legitimized the floating exchange rate system and abolished official rate of gold at annual conference of IMF held at Kingston (Jamaica) in 1976 (Jamaica Accord). Jamaica Accord came into its effect in 1978. After ratification of Jamaica Accord present International Monetary System came into existence. Under this present system countries can adopt any Exchange Rate System ranges from hard peg to free float provided that they do not fixed their currencies to the gold[3]. Between these two extremes there are several Exchange Rate System like soft peg, crawling peg, managed float etc.

IMF broadly classify Exchange Rate System into four categories: hard pegs including exchange arrangements with no separate legal tender and currency board arrangements; soft pegs including conventional pegged arrangement, stabilized arrangement, crawling peg, crawl like arrangement, pegged exchange rate within horizontal bands; floating exchange rate which comprises floating and free floating; and other managed arrangement (residual).

According to IMF Annual Report on Exchange Arrangements and Exchange Restrictions 2021, out of 190 member countries[4] 92 countries adopted soft peg Exchange Rate System. With 47.7% of member countries it is largest type of Exchange Rate System. Equal number of countries (32) has been adopted float and free float system respectively. 25 countries follow hard peg while 12 countries do not follow any Exchange Arrangement.[5]

 As far as India’s exchange rate is concerned, under the Colonial regime, from 1893 to September 1931 Gold Exchange Standard System operated in India in which rupee value fixed against 7.5334 grains of fine gold and exchange rate was 1shilling (s) 4pence (d) per Rupee[6]. Under this regime Government was not obliged to provide gold against rupee. However, it was binding on Government to accept gold and give rupee notes in exchange[7]. After delinking of Sterling from gold in 1931, rupee was only linked to pound sterling at rate of 1 rupee = 1s 6d and and Sterling Exchange System came in existence. After independence, in the line with Bretton Woods System rupee value was fixed against 4.15 grains of fine gold and in currency terms, Sterling Exchange System remained continued. Rupee was devalued by 36.5 % against sterling in June 6, 1966 and this new rupee valued remained constant till breakdown of Bretton Woods System (1971). After breakdown of Bretton Woods System, in December 1971 rupee was linked to pound sterling. Decline in India’s trade share with UK, to ensure rupee stability and to avoid weakness associated with single currency peg in September 1975 sterling – rupee link suspended and India switch towards Managed Exchange Rate System with Basket of Currencies with nominal band of +5/-5 percent. Selection of currencies and its weight were decided by RBI and not disclosed.

In order to sort out BOP crisis, India devalued rupee 18 – 19 percent in two steps on 1 and 3 July 1991 against its major trade partners country’s currencies. Liberalized Exchange Rate System (LERMS) was put in place in March 1992. LERMS was a dual Exchange Rate System in which 40 percent of foreign exchange earnings were exchanged at official rate while remaining 60 percent of export earnings and foreign exchange remittances inflow were allowed to exchange at market rate. The formula of 40:60 of LERMS introduced partial convertibility of rupee on trade account. In 1993, market determined exchange rate system was introduced in which exchange rate was determined by market forces. At present, India follow Managed Exchange Rate System in which exchange rate of Indian rupee is determined by market forces of demand and supply of foreign currencies in Foreign Exchange Market. Reserve Bank of India (RBI) intervenes in Foreign Exchange Market to manage excess volatility in rupee value.

In the context of above background, the paper aims to study the exchange rate behaviour of Indian rupee against US dollar before reform period and after reform period.

Prabirjeet Sarkar (1994), using Difference Stationary (DS) Model examined the India’s Balance of Payments (BOP) and Nominal and Real exchange rate behaviour against US Dollar and Special Drawing Right (SDR) for the period 1971 to 1989. This study indicates that Nominal exchange rate against SDR increased at 8% while against dollar it increased at 6% and depreciation rate was higher in 1980s than in 1970s. Real value of Rupee declined between 4 – 6 % annually. The study further found that increased volatility in BOP components was mainly due to opening economy which increases vulnerability to global shocks and there was no significant relationship with Nominal and Real exchange rate movements and Balance of Trade and BOP behaviour.

Prabirjeet Sarkar (1995), using Ordinary Least Square (OLS) Method studied the India’s trade, Exchange Rate Behaviour against US dollar and SDR, and consumer behaviour over the period June 1991 to August 1994. The study found that exchange rate of rupee against US dollar and SDR depreciated significantly at monthly average of 0.88 and 1.02 % respectively without any smooth trend while Real value of rupee (in terms of SDR) declined 0.53 % per month. The study further concluded that India’s export value in dollar terms increased at rate of 1.1% monthly whereas import value in dollar terms increased at 0.74 % at monthly rate. Using Difference Stationary (DS) Model. The study found that monthly inflation rate in study period was 0.82% higher than developed countries.

Renu kohli (2000), using standard deviation, a statistical measure of volatility analyzed the exchange rate volatility of rupee – dollar for the period 1970 to 1999. The study observed that rupee – dollar exchange rate did not show significant behavioural change  and variability was practically constant around 7 (7.6 for 1970-90 and 7.0 for 1993-99). The study indicates contrary results against industrialized countries.

Samsudheen K Dr. G. Shanmugasundram (2013), using Generalized Autoregressive Conditional Heteroscedaticity Model examined the behaviour of exchange rate and its volatility characteristics over the period April 1973 to March 2012 on daily observation basis of rupee – dollar exchange rate. The study found that exchange rate was highly volatile and volatility after post- Liberalized Exchange Rate Management system (LERMS) was higher relative to pre – LERMS period. 

Subhanil Banerjee (2015), using F Test for compare volatility and Bivariate Regression Analysis for impact of exchange rate on Balance of Trade, compared the exchange rate volatility and impact of exchange rate on Balance of Trade between pre- reform and post – reform period ranging from 1971-72 to 2013-14. The study found that exchange rate volatility and impact of exchange rate on Balance of Trade increased in post – reform period. Further the study concluded that exchange rate under fixed regime was less volatile compared to market determined.

Pooja Mishra and Jaya Gupta (2017), using Vector Autoregression Model examined the effect of differential interest rate, differential groos domestic product (GDP) and differential inflation rate on exchange rate and relationship between exchange rate movements with the same over the period 1993 to 2014. The study documented that in long run differential GDP and interest have negative and differential inflation rate have positive relation while in short run differential GPD and inflation rate do not effect exchange rate. The study further concluded that along with other variables changes in these variables leads to rupee – dollar fluctuation.

Maheswar Sethi, Sakti Ranjan Das, Rabindra Kumar Swain and Seema Das (2021), using Correlation and Regression Analysis studied the effect of Covid – 19 on exchange rate behaviour for advance and emerging countries including India over the period Jan 2020 to April 2021. This study indicates that, daily confirmed and death cases positively affected both countries. The study further concluded that, uncertainty arised due to pandemic leads to depreciation in emerging countries while appreciation in advance countries.

Ashwani Singh Govind Patra (2022), using Generalized Autoregressive Conditional Heteroscedaticity Model examined the effectiveness of the currency futures on Spot exchange rates volatility for the period February-2004 to August-2020. The study found that, prior to introduction of currency future spot exchange rates volatility was high compared to post introduction period.

The study is analytical and descriptive in nature and it is based on secondary data. The period of study is 1975-76 to 2020-21. The reason for taking this period for study is that, prior to 1975-76, India’s exchange rate was fixed. Required data (annual average data on exchange rate) collected from Reserve Bank of India (RBI) publication - Handbook of Statistics on Indian Economy for the period 1975-76 to 2020-21. For examining exchange rate behaviour, entire data was divided broadly into two parts : from 1975-76 to 1990-91 (pre – reform period) and 1991-92 to 2020-21 (post – reform period). Since, after the post – reform period global economic conditions had been change time to time. In the year 1998 – 99, East Asian Financial Crisis and in 2008 – 09 emergence of Global Financial Crisis affected the economic situation, therefore, data on post – reform period was further sub- divided in three sub - period: from 1991-92 to 1998-99, 1999-2000 to 2008-09 and 2009-10 to 2020-21. To examining Rupee – Dollar exchange rate behaviour, the method used vary from descriptive statistics to graphical analysis.

During the entire period of the study, general tendency of rupee is to depreciate against dollar. During Sixteen years of pre- reform period (1975 -76 to 1990-91), rupee depreciated 106.65% against US dollar while in thirty years of post- reform period rupee depreciated 203.28% against US dollar. The detail discussion of the findings of the study can be done by dividing the entire period of the study into four phases. Phase - 1 covers sixteen years of pre – reform period from 1975-76 to 1990-91, phase – 2 covers eight years of post – reform  period from 1991-92 to 1998-99, phase – 3 covers ten years period from 1999 – 2000 to 2008-09 and phase – 4 covers twelve year period starting from 2009 – 10 to 2020- 21  The phase wise data of Exchange Rate Behaviour is given in the following table-

Phase-1(from1975-76 to 1990-91)		Phase-2 (from 1991-92 to 1998-99		Phase-3 (from 1999-2000 to 2008-09)		Phase-4 (from 2009-10 to 2020-21)
Year	US Dollar Average	Year	US Dollar Average	Year	US Dollar Average	Year	US Dollar Average
1975-76	8.6825	1991-92	24.4737	1999-2000	43.3327	2009-10	47.4433
1976-77	8.9775	1992-93	30.6488	2000-01	45.6844	2010-11	45.5626
1977-78	8.5858	1993-94	31.3655	2001-02	47.6919	2011-12	47.9229
1978-79	8.2267	1994-95	31.3986	2002-03	48.3953	2012-13	54.4099
1979-80	8.0975	1995-96	33.4498	2003-04	45.9516	2013-14	60.5019
1980-81	7.9092	1996-97	35.4999	2004-05	44.9315	2014-15	61.1436
1981-82	8.9683	1997-98	37.1648	2005-06	44.2735	2015-16	65.4685
1982-83	9.666	1998-99	42.0706	2006-07	45.2495	2016-17	67.072
1983-84	10.34			2007-08	40.2607	2017-18	64.4549
1984-85	11.8886			2008-09	45.9933	2018-19	69.9229
1985-86	12.2349					2019-20	70.0897
1986-87	12.7782					2020-21	74.225
1987-88	12.9658
1988-89	14.4817
1989-90	16.6492
1990-91	17.9428

(Data source: Handbook of Statistics on Indian Economy, RBI)

Phase - 1, data of exchange rate shows that, exchange rate from 1975-76 to 1980-81 was fairly stable. After that starts declining. Small trade surplus in 1976-77, increased workers remittances from gulf countries and Aid receipts from International Monetary Fund (IMF) resulted in rupee appreciation from 8.9775 rupee per dollar in 195-76 to 7.9092 rupee per dollar in 1980-81. After that, increase in import due to decanalization process and expansion of Open General Licensing (OGL), high rate of inflation in economy, gulf crisis which increased import oil prices and non- conventional loan provided by IMF to finance current account deficit caused consistently increase in exchange rate (decline in rupee value against dollar) from 9.66 rupee per dollar in 1981-82 to 17.9482 rupee per dollar in 1990-91. The graphical representations of phase – 1 exchange rate data have been also depicted in figure – 1.

Figure 1: Rupee – Dollar Exchange Rate (1975-76 to 1990-91)

Period of Phase – 2 was characterize by drastic change in Indian economy policy as New Economic Policy (NEP) was introduced in 1991. Under this process, entire economic policy were liberalized significantly. This phase, in fact, started with the devaluation of rupee (18 – 19 percent against US dollar) in July 1991 in two steps. Except some stability in mid year, exchange rate shows increasing trend during this phase. Devaluation of rupee raised the dollar demand for import which in turn caused rupee value to depreciate against dollar in year 1991-92 to 1992-93. Due to increased capital flows in economy and export growth, RBI intervention in foreign exchange market to prevent rise in rupee value, rupee value against US dollar remained fairly stable during 1993-94 to 1994-95. After that, due to, series of Global factors such as strengthening US dollar, South East Asian and Russian financial crisis and some internal factor such as impositions of economic sanctions after Nuclear test in 1998 caused to depreciate rupee value from 33.4498 in 1995-96 rupee per dollar to 42.0706 rupee per dollar in 1998-99  during this period. The graphical representations of exchange rate behaviour of phase – 2 have been also depicted in figure – 2.       

Figure 2: Rupee – Dollar Exchange Rate (1991-92 to 1998-99)

During phase – 3, exchange rate was remained almost stable. However, in the initial four years of this phase, due to, sharp rise in oil prices and interest rates in developed countries, Rupee value consistently decline from 43.3327 rupee per dollar in 1999-2000 to 48.3953 rupee per dollar in 2002-03. And after that from 2003-04 to 2005 – 06 rupee value was remained stable against US dollar. Again a small depreciation of rupee was observed in 2006-07. After that, due to, weakening of dollar and large capital inflows considerable appreciation in rupee was observed in 2007 – 08 followed by sharp depreciation in 2008-09 reflecting the effect of Global Financial crisis on rupee value. Figure -3 shows the graphical representation of exchange rate data of phase – 3.

Figure 3: Rupee – Dollar Exchange Rate (1999-2000 to 2008-09)

During phase - 4, exchange rate shows ups and downs ended with 74.225 rupee per dollar in 2020-21. In starting year of this phase, surge in capital inflows due to higher interest rates and Gross Domestic Product (GDP) in economy resulted in appreciation of rupee against dollar from 47.4433 rupee per US dollar in 2009-10 to 45.5626 rupee per US dollar in 2010-11 and after that, appreciation of US dollar against other currencies and uncertain environment in global financial market caused rupee value declined continuously from 47.9229 rupee per dollar in 2011-12 to 67.072 rupee per dollar in 2016- 17. Year 2017-18 observed slight increase in rupee value from 67.0720 in 2016-17 to 64.4549 rupee per dollar in 2017-18 and then, from 2018-19 to 2020-21 rupee depreciated against dollar. Outbreak of COVID 19 in December 2019 led to deterioration in global and domestic economic conditions reflected in depreciation in rupee value. In year 2020-21, rupee record historically low, ended with 74.225 rupee per US dollar. . The graphical representations of phase – 4 exchange rate data have been also depicted in figure – 

 Figure 4: Rupee – Dollar Exchange Rate (2009-10 to 2020-21)

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2. Sarkar Prabirjeet (1995); “Indian Economy since 1991, Trade, Price and Exchange Rate Behaviour”. Economic and Political Weekly. Vol. 30, pp. 1197 – 1201.

3. Kohli Renu (2000); “Aspects of Exchange Rate Behaviour and Management in India 1993-98”. Economic and Political Weekly. Vol. 35, no. 5,

4. Panagariya Arvind (2004); “India in the 1980s and 1990s: A Triumph of Reforms.” IMF Working Paper.

5. Jadhav Narendra (2005); “Exchange Rate and Capital Flows: the Indian Experience”. Chief Economists Workshop, April 4 – 6, 2005.

6. Copeland, S.  Laurance (2014); “Exchange Rates and International Finance”; Sixth Edition, 2014.

7. Banerjee Subhanil (2015); “Exchange Rate volatility in Pre and Post Reform India : Impact on Balance of Trade”. Utkal Economic Papers Journal of Department of Analytical and Applied Economics, Vol.17, 2014-15.

8. Misra Pooja and Gupta Jaya (2017); “USD–INR Exchange Rate Movements: An Empirical Analysis of Macroeconomic Determinants”. Amity Journal of Economics, Vol 2, Issue 1.

9. IMF (2021); “Annual Report on Exchange Arrangements and Exchange Restrictions.”

10. Acharya Rajat (2022); “International Economics An Introduction to Theory and policy”. Second Edition, Oxford University press.

11.https://www.nottingham.ac.uk/manuscriptsandspecialcollections/researchguidance/ weightsandmeasures/money.aspx