Liberalized Exchange Rate Management System (Lerms)

In view of the continuing pace of liberalization policy, the Liberalized Exchange Rate Management System (LERMS) has assumed a special significance in the arena of international financial management.  Already the rupee has been made fully convertible on current account.  The main objective of the Government is to move the rupee finally into the era of full convertibility to boost exports. The Government in this connection issued memorandum of LERMS.  The basic features of LERMS can be stated as follows:

• The exchange rate of the rupee will be determined purely on the basis of market forces of demand and supply.  It may, therefore, also could be described as “market determination exchange rate system”.
• All receipts whether on current or capital account and of the balance of payments and whether on government or private account will be converted entirely at the market rate of exchange.
• NRIs will be permitted to maintain the Residents Foreign Currency Account (RFCA) to which the entire foreign exchange brought in by them will be credited.  Moreover, those Indians who get receipts from abroad now can have the benefit of getting the entire foreign currency credit to them at the market rate.
• Exporters and the recipients of inward remittances are required to surrender the foreign currency received by them to the authorized dealers in foreign currency.  However, they are allowed to maintain 15% of the receipts, in foreign currency account with an authorized dealer.
• There is no obligation on the authorize dealers to sell any portion of their foreign currency receipts direct to the Reserve Bank as was the case so far.  They can sell the receipts in the Indian Market either to other authorized dealers or for any permissible transactions.
• Foreign currency remittances abroad are subject to the exchange control regulations, Of Course, it does not mean that the Reserve Bank of India's permission would be required in every case.
• The intervention currency of the Reserve Bank continues to be US Dollar.  It may at its discretion buy and sell US dollars from/to various authorized dealers.