Managed Floating Exchange-Rate Regime

A managed floating exchange rate is primarily determined by demand and supply in the foreign-exchange market, but the central bank intervenes when it considers market movements undesirable. It combines market-based price discovery with discretionary official management, without the continuous defence of an immutable parity.

Market determination of the exchange rate

The exchange rate adjusts to balance the market demand for and supply of foreign currency. Under a quotation expressed as domestic currency per unit of foreign currency, excess demand for foreign currency causes depreciation, while excess supply causes appreciation.

• Foreign-currency demand arises from imports, overseas investment, debt payments and other outward transfers.
• Foreign-currency supply comes from exports, remittances, foreign investment, external borrowing and other inward receipts.
• Trade conditions, inflation, interest rates, economic growth, risk perceptions and market expectations influence these flows.

How the central bank manages the float

The central bank can alter the market outcome through spot or forward intervention. It may sell foreign currency and buy domestic currency to moderate depreciation, or buy foreign currency and sell domestic currency to moderate appreciation.

• Intervention changes the central bank's foreign-exchange reserves and can affect domestic liquidity.
• The liquidity effect may be offset through sterilisation, using monetary operations to neutralise the change in the monetary base.
• Management generally seeks to contain excessive volatility or disorderly conditions rather than prevent every exchange-rate movement.

India's exchange-rate framework

India has followed a market-determined exchange-rate system since March 1993. The Reserve Bank of India intervenes to curb excessive volatility and preserve orderly market conditions, while not maintaining a fixed exchange-rate target or band.

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