Changes in fixed reverse repo/repo rates set by the RBI from time to time for the conduct of LAF, under which the central bank conducts daily auctions for the banks, have emerged as the main instruments for interest rate signalling in the Indian economy. Inter-bank turnover in the foreign exchange market has nearly quadrupled between 2000-01 and 2006-07 to Rs. 840 billion.
Average daily turnover in the foreign exchange market (interbank as well as merchant) has increased from US $ 5 billion in 1997-98 to US $ 23 billion by 2006-07. The exchange rate of the Indian rupee has exhibited significant two-way movements in the recent years. Efficiency in the foreign exchange market has also improved as reflected in the decline in bid-ask spreads.