c. Role of RBI in maintaining stability of rupee

♤ The exchange rate of the Rupee is largely determined by demand and supply conditions in the foreign exchange market.

♤ The Reserve Bank has the role of maintaining stability in the foreign exchange market by ensuring orderly conditions without targeting a pre-specified level or band for Rupee’s exchange rate.

♤ In recent times, Rupee saw too much of fluctuation in foreign exchange market. Then, in order to stabilize the value of rupee, RBI has taken various measures like clamping restrictions on import of gold, tightening the position limits on currency futures, prohibiting arbitrage trades between futures and OTC markets, rationalizing forex outflows by residents and encouraging capital inflows.