Rupee Made Market-Determined

Following the twin devaluations of 1991, India's foreign exchange system remained a hybrid — part fixed, part market-determined under the Liberalised Exchange Rate Management System (LERMS). In 1993, the government took the final step, unifying the exchange rate and making the rupee fully convertible for current account transactions.

For the first time in independent India's history, the rupee's value was set by supply and demand in the foreign exchange market rather than by government decree. The dollar settled at ₹31.37 following unification — significantly weaker than the pre-1991 peg, but stable under the new system.

The shift was quietly significant. It meant that India's commodity import costs — oil, gold, fertiliser — would now directly reflect global price movements transmitted through the exchange rate. When the rupee weakened, imports became more expensive immediately. This linkage made exchange rate management a permanent feature of India's macroeconomic policy toolkit.

For commodity traders and Indian households, the change meant that international gold and oil prices — priced in US dollars — now had a direct, undiluted impact on domestic rupee prices. A weaker rupee would henceforth amplify every global commodity price increase. This is the structural reason why gold and petrol prices in India are determined by two forces simultaneously: global commodity markets and the rupee-dollar exchange rate.