Role of Reserve Bank of India(RBI): The exchange rate is a significant tool used to examine the efficiency of economy.

The exchange rate of the Indian rupee is dependent upon the market conditions, where the demand and supply play a major role. In order to foster the effective exchange rates the RBI makes buy and sell transactions to keep the low variability and volatility in exchange rates. RBI also remove the excess liquidity from the economy by increasing the CRR and SLR. THE RBI India also managed floating exchange rate mechanism. This means that the RBI interferes only when the circumstances demand and/or if the exchange rate gets out of control by increasing or reducing the money supply. RBI has been extremely cautious in its intervention during the entire rupee depreciation crises. RBI has however reacted with timely interventions by selling dollars intermittently to tame sharp fall in the currency. The outflow of dollar reserves from RBI coffers has been extremely cautious, mostly due to the dwindling foreign exchange reserves. The foreign exchange reserves of India in December 2011 stood at 270 billion USD. Recently RBI has intervened with key policy initiatives such as intervening in the forward contracts policy. As per new RBI policy the cancelled forward contracts cannot be rebooked. Exporters in order to rake in more profits, were booking forward contracts, then cancelling the contracts, and again rebooking at better rate. This process led to a further depreciation in rupee and fuelled speculations. Also, RBI intermittently put trading limits for the banks in the foreign exchange market in order to tame the speculative forces. Looking at the current economic outlook, the currency crises seems to stay for a much longer period this time around. However, a structuring of Greek debt coupled with higher inflows from FIIs can lead to an arrest in the falling rupee. CONCLUSION: Conclusively, appreciation and depreciation of rupee cannot certainly be taken as beneficial to the Indian economy in general. On one hand the rupee appreciation will affect exporters, BPOs, etc., on the other, rupee depreciation will affect importers. It is difficult to take a view on future rupee levels currently as it is being driven by sentiment currently. And so long as the risk aversion mood remains, rupee will continue to be under pressure, said Ashish Parthasarthy, treasurer at HDFC Bank. Parthasarthy added active intervention by the Reserve Bank of India was needed to help subside The panic and smoothen any wrinkles in the foreign exchange market. So now it depends on what the future has to reveal for, how effectively the central bank can balance the Foreign Exchange rates with little impact to the relative areas of FX usage. However, according to the finance ministry, the rupees depreciation is only a short-term disruption which does not require central bank intervention.