Revista de economía global

Effect of Managed Floating Exchange Rate on External Sector of India

Abstract

Pankaj Nishad

The main objective behind this paper is to show a relationship between India's exchange rate and key macroeconomic indicators of the Indian economy.
The macro-economic indicators in it-self involve well diversified and broad concepts of Indian financial system. Indicators are further sub divided into various variables as per their functions. If we see the external sector, it includes foreign exchange reserves. Moving on to the financial market, it includes capital market, government securities investments. Another important macroeconomic indicator is the financial sector; it includes reserve money and RBI's open market operations. Finally the fourth sector i.e., the real sector, it includes prices WPI (Wholesale Price Index) and CPI (consumer price index).
This paper examines the evolution of Exchange Rate Policies in the India. It looks at why India have made a transition from fixed or “pegged” exchange rates to “managed floating” or “independently floating” currencies. It discusses how economies perform under different exchange rate arrangements, issues in the choice of regime, and the challenges posed by increasing capital mobility. The paper has been organized in the following sections. Section I provides measurement of daily annualized volatility during various episodes of exchange market pressure and RBI response on that. Section II sets out the concept of impossible trinity. Section III covering the question-where is India in the “Trillemma”. Section IV focuses on the Econometric analysis of Exchange Rate effect on macroeconomic indicators.