India's Exchange Rate System

The adoption of an exchange rate system is a crucial aspect of a country's monetary policy. In the case of India, the exchange rate system has undergone significant changes over the years. Let's analyze the given statements regarding India's exchange rate system in detail.

i. India adopted LERMS in 1992
The statement is correct. LERMS stands for the Liberalized Exchange Rate Management System. It was introduced in India in 1992 as a transitional arrangement towards a market-determined exchange rate system. LERMS aimed to reduce the control of the central bank over the exchange rate and allow market forces to play a more significant role in determining the value of the Indian rupee.

Under LERMS, the exchange rate was determined by a dual mechanism. The exporters and foreign exchange earners had to surrender 40% of their foreign exchange earnings at the official exchange rate, while the remaining 60% could be converted at the market-determined exchange rate. This system was intended to gradually move towards a more flexible exchange rate regime.

ii. In 1993, dual exchange rate system was replaced by a unified floating exchange rate.
The statement is also correct. In 1993, the dual exchange rate system, which was implemented under LERMS, was replaced by a unified floating exchange rate system. This transition marked a significant shift towards a market-determined exchange rate.

Under the unified floating exchange rate system, the value of the Indian rupee is determined by market forces of demand and supply in the foreign exchange market. The Reserve Bank of India (RBI) intervenes in the market only to manage excessive volatility or to maintain stability in the exchange rate.

The adoption of a unified floating exchange rate system allowed for greater flexibility in the exchange rate, enabling it to adjust to external shocks and changes in market conditions. It also eliminated the need for dual rates and simplified the exchange rate mechanism in India.

Conclusion
In conclusion, both statements are correct. India adopted LERMS in 1992 as a transitional arrangement towards a more market-determined exchange rate system. In 1993, the dual exchange rate system was replaced by a unified floating exchange rate, which allowed for greater flexibility and simplified the exchange rate mechanism in India.