In the case of most developing countries, which specialise in labour-intensive and low and intermediate technology products, profit margins in the highly competitive markets are very thin and vulnerable to pricing power by large retail chains. Consequently, exchange rate volatility has significant employment, output and distributional consequences.
Foreign exchange market conditions have remained orderly in the post-1993 period, barring occasional periods of volatility (Chart 10). The Indian approach to exchange rate management has been to avoid excessive volatility. Intervention by the Reserve Bank in the foreign exchange market, however, has been relatively small compared to total turnover in the market.