Partial Convertibility of Rupee
The above mentioned Liberalized Exchange Rate Management System (LERMS) introduced a dual exchange rate system. This is also called as partial convertibility of the Rupee.
Meaning of Convertibility
The convertibility of a currency has different meanings in different times. In existing standards, it means that the country’s currency becomes convertible in foreign exchange and vice versa. The Convertibility of Rupee gives the indication of the real value of rupee, hence called floating of Rupee. Full Convertibility of Rupee encourages the exports by increasing the profitability of the exports, as the free market rate is higher than the official rate.
Further, it is seen the convertibility of the Rupee and liberalization of Gold imports has made the illegal remittances and gold smuggling less attractive.
Partial Convertibility of Rupee was introduced in March 1992
Under the partial convertibility of Rupee, dispensation of 40% of the Foreign exchange had to be surrendered to the Reserve Bank of India at the official rate and balance 60% of the foreign exchange had to dispose off by the exporters at the market rate.
As expected, the market rate was higher than the official rate.
The Partial convertibility of Rupee is known as Dual exchange system.
At that time, India’s current account was showing large deficit so it was risky to introduce the full convertibility of Rupee.
The major objective of the partial convertibility of Rupee was to “make the foreign exchange available at a low price for essential imports so that the prices of the essentials is not pushed up by the high market price of the foreign exchange”.