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The Liberalised Exchange Rate Management System (LERMS) was introduced in the 1992-93 Budget to allow partial convertibility of the rupee, enabling exporters and remittance recipients to sell foreign exchange at market-determined rates. Under LERMS, 40% of foreign exchange earnings must be surrendered at the official rate, while the remaining 60% can be retained for free market transactions. This system aims to facilitate trade, enhance export incentives, and integrate the Indian economy with global markets.

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13 views3 pages

LERMS.docx

The Liberalised Exchange Rate Management System (LERMS) was introduced in the 1992-93 Budget to allow partial convertibility of the rupee, enabling exporters and remittance recipients to sell foreign exchange at market-determined rates. Under LERMS, 40% of foreign exchange earnings must be surrendered at the official rate, while the remaining 60% can be retained for free market transactions. This system aims to facilitate trade, enhance export incentives, and integrate the Indian economy with global markets.

Uploaded by

pednekaramisha7
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© © All Rights Reserved
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Liberalised Exchange Rate Management System:

The Finance Minister announced the liberalised exchange rate


management system (LERMS) in the Budget for 1992- 93.
This system introduced partial convertibility of rupee. Under
this system, a dual exchange rate was fixed under which 40
per cent of foreign exchange earnings were to be surrendered
at the official exchange rate while the remaining 60 per cent
were to be converted at a market-determined rate. The main
objective of the Government was to move the rupee finally
into the era of full convertibility to boost exports.

Under the LERMS, exporters of goods and services and those


who are recipients of remittances from abroad could sell the
bulk of their foreign exchange receipts at market determined
rates. Similarly, those who need to import goods and services
or undertake travel abroad could buy foreign exchange to
meet such needs, at market determined rates from the
authorized dealers, subject to their transactions being eligible
under the liberalized exchange control system.
The authorized dealers were required to surrender 40% of
their purchases of foreign exchange to the RBI at official rate.
The remaining 60% could be retained by them for sale in free
market for all permissible transactions.
Basic features of LERMS can be stated as follows:
1)​The exchange rate of the rupee will be determined purely
on the basis of market forces of demand and supply.
2)​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.
3)​ 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.
4)​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.
Advantages:-
1)​It has facilitated removal of several trade restrictions and
granted relaxation in exchange control (under current
account transactions).
2)​ It is a step towards full convertibility of current account
transactions in order to achieve the full benefits of
integrating the Indian economy with the world economic
system.
3)​ The incentives to exporters will be higher and more
particularly to those whose exports are not highly import
intensive. Exporters of agricultural products will find
exports attractive.
4)​A large number of expatriates, who are hitherto denied
any advantages on their remittances to India in line with
the earnings of the exporters, are now eligible for market
rate for the full amount of remittances being in the nature
of capital inflows. Hence, the lesser will be the
temptation to using illegal channels for remittances.

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