Indian currency, the “rupee’, was historically linked with the British Pound Sterling till 1948 which was fixed as far back as 1928. Once the IMF came up, India shifted to the fixed currency system committed to maintaining rupee’s external value (i.e., exchange rate) in terms of gold or the US ($ Dollar). In 1948, Rs. 3.30 was fixed equivalent to the US $ 1.
In September 1975, India delinked rupee from the British Pound and the RBI started determining rupee’s exchange rate with respect to the exchange rate movements of the basket of world currencies (£, $, ¥, DM, Fr.). This was an arrangement between the fixed and the floating
In 1992–93 financial year, India moved to the floating currency regime with its own method which is known as the ‘dual exchange rate’.12 |There are two exchange rates for the rupee, one is the official rate and the other is the ‘market rate’.
Here the point should be noted that it is every day’s changing market-based exchange rate of rupee which affects the official exchange rate and not the other way round. But the RBI may intervene in the forex market via the demand and supply of rupee or the foreign currencies. Another point which should be kept in mind is that none of the economies have till date followed an ideal – free-floating exchange rate. They require some mechanism to intervene in the foreign exchange market because this is a highly speculative market.