Fixed Regime to Market Determined Floating Regime

During the period 1991 to 1995, India moved from a fixed exchange rate system to partial float exchange rate system to a free float or floating rate market determined exchange rate system.

In the fixed exchange regime, which India followed till 1991, the exchange rate was fixed by the RBI and was pegged to a basket of currency - US Dollars, Pound Sterling (UK), Deutsche Marks (Germany) and few other currencies.

After the Balance of Payment crisis in 1991, as part of the IMF's stabilization program, India moved to a partial float mechanism. As per this mechanism, the inward flow of foreign currency into the country by way of exports was converted into Rupee in the following ratio - 60% at a rate fixed by RBI which was around Rs.28 to a USD and the balance 40% at a market determined rate - which was generally higher at Rs.32 to a USD. However, anyone in India who wants to buy foreign currency for importing goods has to pay the market determined higher rate of Rs, 32 to a USD.

This partial float of the currency was later changed to fully floating or a market determined exchange rate system, where neither RBI nor the Government of India fixed the exchange rate and allowed the players in the market determine the exchange rate. So any foreign exchange that was brought into the country was converted at a rate determined by the market.