LERMS (Liberalized Exchange Rate Management System) was a new exchange rate management system. The Reserve Bank of India (RBI) purchased 40 percent of the proceeds of exports and inward remittances at the official exchange rate for official use under this scheme. Following the recommendations of the C. Rangarajan Committee, the Liberalized Exchange Rate Management System (LERMS) with the dual exchange rate was implemented. It came into effect on March 1, 1993. The UPSC IAS Exam includes LERMS (Liberalized Exchange Rate Management System) as an important topic in the Indian Economy Syllabus.

What is Liberalized Exchange Rate Management System?

• In March 1992, the Indian government implemented the Liberalized Exchange Rate Management System (LERMS).
• Dr Manmohan Singh revealed the new approach in his 1992 budget, and the Reserve Bank of India announced it in early March (RBI).
• This was the first step toward making the switch to a market-determined exchange rate system possible.
• It allowed exporters to realize 60% of their revenues or earnings at market rates while surrendering the rest at the government rate.
• To put it another way, India made the transition from a fixed to a dual exchange rate system.
• Essential materials or products, such as petroleum, fertilizers, and life-saving pharmaceuticals, were imported using foreign exchange surrendered at the official rate.

Features of Liberalized Exchange Rate Management System

The following are the basic characteristics of LERMS:

• The rupee's exchange rate will be set entirely by market forces of demand and supply.
• As a result, it might also be referred to as a "market determination exchange rate system."
• All receipts, whether on the current or capital account, and whether on the government or private account, will be exchanged totally at the market rate of exchange.
• NRIs will be able to open a Residents Foreign Currency Account (RFCA), which will be credited with all of the foreign currency they bring in.
• Furthermore, Indians who get receipts from abroad now have the option of receiving the complete foreign currency credit at market rates.
• Authorized dealers are no longer required to sell any percentage of their foreign currency receipts directly to the Reserve Bank, as was formerly the case. They can sell the receipts in the Indian Market to other approved dealers or for any transaction that is legal.
• Foreign currency remittances outside of India are subject to exchange control restrictions. This does not mean that authorization from the Reserve Bank of India is required in every circumstance.
• The Reserve Bank's intervention currency remains the US dollar. It may buy and sell US dollars from and to various approved dealers at its discretion.

Modified Liberalized Exchange Rate Management System

• The process of liberalization progressed, and on March 1, 1993, it was agreed to make the Rupee fully floating.
• Modified Liberalized Exchange Rate Management System, or Modified LERMS, is the name of the new system.
• All foreign exchange transactions, receipts, and payments, both in the current and capital accounts of the balance of payments, are routed through authorized dealers at market-determined exchange rates as of March 1, 1993.
• Authorized dealers are free to keep all foreign exchange surrendered to them for sale in permitted transactions and are not obligated to transfer any share of such revenues to the Reserve Bank.
• Foreign exchange receipts must be returned to authorized dealers unless the residents have been granted permission by the RBI to keep them with banks in India or overseas.
• The Reserve Bank of India was required to buy and sell foreign exchange to approved dealers under Section 40 of the RBI Act, 1934.
• The Reserve Bank is now required to sell US Dollars to any authorized individual at its offices/branches for fulfilling foreign exchange payments at market prices only for purposes permitted by the Central Government.

Advantages of New System

• With respect to a wide subset of external transactions, the system tries to keep demand and supply equilibrium.
• It has permitted the lifting of various trade restrictions as well as exchange control liberalization (under current account transactions).
• It is a step toward full convertibility of current account transactions, which will allow India to receive the full benefits of economic integration with the rest of the globe.
• Exporters will receive greater incentives, particularly those whose exports are not heavily dependent on imports. Exports will be appealing to agricultural product exporters.

Conclusion

Because of the rapid speed of policy liberalization, the Liberalized Exchange Rate Management System (LERMS) has taken on a new significance in the world of international finance. On the current account, the rupee has already been made fully convertible. The government's major goal is to get the rupee closer to complete convertibility in order to stimulate exports.