The overvalued rupee: Managing exchange rate volatility and forex reserves

The more things change, the more they remain the same for the Indian rupee’s (INR) exchange rate versus the US dollar. Except for brief intervals, the effective real exchange rate of the INR has been substantially overvalued against the dollar. The INR was devalued by 30.5, 57 and 19.5 per cent in September 1949, June 1966, and July 1991, respectively. In 1949, the INR devaluation was linked to a downward correction in the pound sterling against a strong dollar following the Second World War.

Since the 1950s it has usually been a cocktail of partisan domestic interests that has resulted in

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