The correct option is 2 and 3 only.
Explanation
Foreign exchange reforms in India, initiated primarily in 1991, marked a transition from a fixed exchange rate regime-where the government determined the currency value-to a market-determined system. These reforms were crucial in addressing the Balance of Payments (BoP) crisis and integrating the Indian economy with the global market.
Statement-wise Analysis:
- Statement 1 is Incorrect. Prior to the reforms, the exchange rate was strictly controlled and fixed by the government. However, a key objective of the foreign exchange reforms was to dismantle this strict control. Consequently, the determination of the rupee value is no longer strictly controlled by the government; instead, it has transitioned to a system where market forces play the primary role.
- Statement 2 is Correct. Currently, India follows a Managed Floating Exchange Rate System. In this regime, the exchange rate is primarily determined by the market forces of demand and supply of foreign exchange. The Reserve Bank of India (RBI) intervenes only to contain excessive volatility, not to set a specific rate.
- Statement 3 is Correct. To resolve the severe Balance of Payments (BoP) crisis of 1991, the Government of India devalued the rupee against major foreign currencies in two distinct steps in July 1991. This devaluation was intended to make exports cheaper and more competitive, thereby increasing foreign exchange inflows.
Key Takeaway:
The 1991 reforms shifted India's exchange rate mechanism from a fixed regime to a Managed Float, where rates are market-determined but monitored by the central bank to ensure stability. Devaluation was an immediate policy tool used to mitigate the 1991 BoP crisis.