not been clear. we must appreciate that restrictions on capital flows were enshrined in the bretton woods system. however, after the breakdown of the bretton woods system in the early seventies, a set of strong arguments emerged in favour of free capital flows and was endorsed by imf. in the wake of the far eastern crisis of the late 1990 ’ s, the debate about its desirability was revived. the debate again came to life after the global financial crisis and there has been a general agreement since that – and i quote the words of harry dexter white, one of the principal architects of the bretton woods, – “ the desirability of encouraging the flow of productive capital to areas where it can be most profitably employed needs no emphasis, but there are periods when failure to manage flows have led to serious economic disruption. ” keynes was in agreement. 6. the reason i have dealt with the propositions relating to trade and capital flows is to bring out the point that there is no universally acceptable policy prescription relating to either. both theory and empirics accommodate the possibility of specific sets of policy appropriate to a country ’ s idiosyncratic requirements and it is in this backdrop that we shall consider our policies in respect of cross - border transactions, past and present. 7. there are several dimensions of the regime for cross border transactions : but what we shall be concerned with in this discussion is that relating to exchange control or rather foreign exchange management. the foreign exchange management policy ultimately hinges on two factors : the quantity of foreign exchange available and the exchange rate. this has guided the evolution of the exchange control regime in india, and indeed elsewhere in the world. 8. the war - time exchange control through administrative fiat was converted to a statutory regime in 1947 through the fera, 1947. the acute shortage of foreign exchange in the 1960 ’ s and various other factors such as food shortage, wars, etc. led to a more stringent regime through the fera, 1973. foreign exchange per se was considered important and the policy regime comprised rules to grudgingly allocate foreign exchange to various demands. import control and promotion of import substitution provided complimentary policy instruments. beginning midseventies ( soon after the enactment of fera, 1973 but not necessarily because of it ), the situation relating to the external sector started improving primarily because of increasing remittances from indian diaspora and impact of green revolution. thus, through the 1980 ’ s, there was

action. 19. now i come to the foreign exchange markets. i am aware that treasury professionals dealing with the forex market constitute a large part of this gathering and this is a theme with which you are closely involved. as i mentioned earlier, an orderly forex market is an important objective and also a precondition driving the evolution of the exchange management regime. we have come a long way from the days of ‘ rbi ’ s middle rate ’. today, the indian forex market is pretty well developed in terms of daily turnover as well as the range of products available. yet, it continues to be a regulated market and let us now turn to the motivation for and the future of the regulatory regime. 20. the forex market determines the exchange rate, an important macro - variable with implications for balance of payments, monetary policy, capital flows, and several other derived issues. now, it is well known that in the long run the exchange rate depends on economic fundamentals like inflation, interest rates, balance of payment position, etc., but in the short run there can be significant deviations in the exchange rate from the value dictated by the fundamentals. though the exchange rate can be measured in several ways such as reer, neer with different combinations of currencies and different weighing schemes, my discussion will be centred around the headline inr - usd rate, which drives sentiments and decisions. the fluctuations in the exchange rate are caused by sentiments and perceptions of a host of events, some domestic and some global. as you dealers say, “ buy the rumour, sell the news ”. we have had many such episodes. during the last one year or so the rupee saw levels of 64 to a dollar in march 2018, depreciated to near - 75 levels in october 2018 and again appreciated to 68 + levels by march, 2019 and has been trading almost flat since then. during this one year, there has not been any change in the fundamentals of the indian economy, nor any dramatic change in the global conditions either. the cause mostly has been surge or ebb in capital flows, driven by perceptions and risk aversion or appetite. however, understanding these gyrations in the exchange rate does not provide any solace to the policy maker : there is a response necessary lest the expectation turn to panic and bring a great deal of disorderliness in the market in its wake. the first line of defence is market interventions. but then the impossible trinity comes