The exchange rate system was reformed to reflect market conditions. What type of exchange rate regime did India adopt post-1991?​

Correct option is B

The correct answer is: (B) Managed floating exchange rate

• After the economic reforms in 1991, India adopted a managed floating exchange rate system.

• Under this system, the Indian Rupee (INR) is allowed to fluctuate in the foreign exchange market based on market forces (supply and demand), but the Reserve Bank of India (RBI) intervenes occasionally to stabilize the currency or address excessive volatility.

• This regime provides a balance between market-driven exchange rates and government intervention to ensure stability and prevent excessive fluctuations.

• Managed Floating System: The RBI’s role is to ensure that the rupee does not move too drastically in either direction, maintaining economic stability and competitiveness.

• Pre-1991 System: India had a fixed exchange rate system until 1991, where the rupee was pegged to a basket of currencies.

• Post-1991: The liberalization of the economy and the move to a managed floating system marked a significant shift in India’s foreign exchange policy.

• India’s foreign exchange reserves also grew significantly after adopting the new exchange rate regime.