The Reserve Bank of India (RBI) follows a "managed float" system for exchange rate management. The rupee's value is largely determined by market forces, but the RBI intervenes periodically to prevent excessive volatility. The primary objective is to maintain orderly market conditions, avoid sharp appreciation or depreciation that could harm economic stability, and support India's external sector. The RBI uses foreign exchange reserves to intervene—buying dollars to prevent appreciation or selling dollars to curb depreciation—striking a balance between market forces and macroeconomic stability.

Recently, India’s exchange rate policy has shifted subtly, emphasizing a more flexible regime to allow the rupee to adjust to external shocks. This aligns with India’s flexible inflation targeting framework, where the exchange rate affects monetary policy transmission. Interventions now mainly smooth temporary disruptions rather than resist fundamental market trends.

There is also greater focus on building and maintaining robust foreign exchange reserves as a buffer against external shocks, enhancing credibility. The RBI has improved communication and transparency about interventions, while keeping timing and quantum discrete.

Additionally, the RBI closely monitors capital flows, external debt, and global financial developments to mitigate potential risks. Policy measures are coordinated with fiscal and macroprudential policies to ensure stability. By adopting a forward-looking approach and learning from global experiences, the RBI aims to foster confidence among investors, stabilize the rupee, and support India’s economic growth while gradually integrating the currency into international markets. This policy reflects India’s evolving economic sophistication and resilience.