Exchange rate
Also: exchange rates, rupee depreciation, REER, NEER
Background and evolution
The impossible trinity, or policy trilemma, is a helpful frame for understanding India's choices: a country cannot simultaneously have a fixed exchange rate, free capital movement and an independent monetary policy. India has chosen a middle path, with partial capital controls, a managed exchange rate and a monetary policy focused on inflation targeting. This explains why the RBI watches the rupee closely but does not defend a fixed level.
Until 1991 the rupee's value was fixed by the authorities, first linked to the pound sterling and later to a basket of currencies. During the 1991 balance of payments crisis, the rupee was devalued in two steps, and in 1993 India moved to a market-determined exchange rate. Since then the RBI has not targeted a particular level, but it buys or sells dollars to prevent excessive swings, especially during episodes of capital outflow.
This page is not about how the balance of payments is recorded, which is covered elsewhere, but about how to interpret exchange rate movements: what makes the rupee rise or fall, how to read the different measures of its value, and who wins and loses from a stronger or weaker currency. Candidates are often asked to explain a depreciation episode and evaluate policy responses, so this practical lens is the focus here.
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Last reviewed: 23 October 2026 · Original UPSCPrep.in content.