Liberalised Exchange Rate

Management
System(LERMS)
LERMS was introduced on 1 march 1992.

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By this scheme, partial convertibility of the rupee

was introduced.
The imports of materials other than petroleum, oil
products, fertilizers, defense and lifesaving drugs
and equipment always had to be effected against
market determined rates.
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

The exchange rate of the rupee will be
determined purely on the basis of market
forces of demand and supply.
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
Exporters and the recipients of inward
remittances are required to surrender the

Modified LERMS
Effective March 1, 1993, all foreign exchange
transactions, receipts and payments, both under
current and capital accounts of balance of payments
are being put through by authorized dealers at
market determined exchange rates.
Foreign exchange receipts are to be surrendered to
the authorized dealers except in cases where the
residents have been permitted by RBI to retain them
either with the banks in India or abroad.
Reserve Bank of India, under Section 40 of RBI Act,
1934, was obliged to buy and sell foreign exchange
to the authorized dealers.
Reserve Bank is now required to sell any authorized
person at its offices/branches US Dollars for meeting
foreign exchange payments at its exchange rates

Advantages of Modified LERMS in FOREX

The system seeks to ensure equilibrium
between demand and supply with respect to
a fairly large subset of external transactions
It has facilitated removal of several trade
restrictions and granted relaxation in
exchange control.
Authorized dealers are free to retain the
entire foreign exchange surrendered to them
for being sold for permissible transactions
and are not required to surrender to the
Reserve Bank any portion of such receipts
It is a step towards full convertibility of
current account transactions in order to
achieve the full benefits of integrating the