What is LERMS? What were its major features LERMS? What were its implications?

Liberalized Exchange Rate Management System (LERMS) was a new system of exchange rate management. According to this system, forty percent of the proceeds of exports and inward remittances was purchased at the official exchange rate by the (RBI) Reserve Bank of India for official use. Receipts and Payments on capital account continued to be subject to controls.

All other Receipts and Payments are converted at the market exchange rate. R.B.I. can enter the free market and intervene at its discretion.

Imports under advance and impress licenses and replenishment imports against gems and jewelry exports were paid at official exchange rate to the extent of 40 percent of the import value.

Also read | Foreign Investment Policy India 1948-1990.

EPZs and EOUs were allowed to convert all their exchange earnings at the market rate.

All other imports of raw materials, components and also capital goods are made freely importable on OGL but foreign exchange for these imports has to be obtained from the market.

The foreign exchange surrendered at the official exchange rate was utilized to import essential items.

Also read | The rationale for economic reform.

The new system was introduced as a transitional arrangement towards a unified exchange rate with current account convertibility. By eliminating detailed exchange control, the system simplified the trade-policy.