Journey of the Indian Rupee can best be traced after India’s independence in the year 1947 when it was at par with the American dollar. There existed no foreign borrowings on India’s balance sheet and the economy was off to a decent start.
India adopted the fixed currency exchange rate regimen post independence. As a consequence, the Indian Rupee was pegged at 4.79 against a dollar. For nearly forty six years India followed the practice of a fixed exchange rate policy. Consecutive wars of 1962 and 1965 added to the strain on the rupee and the government was forced to peg it down to Rs 7.57 against a dollar. In fact the Indian Rupee slide began much earlier in the year 1951 with the introduction of the first five year plan. Government of India launched many developmental and welfare schemes and the economy resorted to external borrowings. This led to the devaluation of the Indian rupee.
1971 saw the delinking of the rupee from the British pound. The Indian rupee was then directly linked to the US dollar, the German Mark and the Japanese Yen. Meanwhile the Indian rupee continued to weaken against the dollar and it was devalued from time to time. India’s imbalance trade with rising import bill compounded the problem and by the year 1985 a dollar was worth rupees twelve.
The last decade of the century brought with it serious consequences for the Indian economy. The economy was close to a default, the Reserve Bank of India had refused credit and the foreign exchange reserves were reduced to a point where they could finance just three weeks of import bill. Desperate situation called for desperate measures and the Indian Government was forced to airlift its gold reserves as pledge for borrowings from the International Monetary Fund. The situation was precipitated by the Gulf War, the overvalued rupee, current account deficit and a weakened foreign investor confidence. The Indian rupee was sharply depreciated against major world currencies between 1st and 3rd July, 1991. The rupee stood at Rs 17.90 against a dollar.
The collateral secured India a $2.2 billion loan from the IMF and $600 million from the Union Bank of Switzerland. Dr Manmohan Singh, then as Finance Minister kick-started the economic reforms blitzkrieg.
With PV Narsimha Rao at the helm and Manmohan Singh as the Finance steward, the Indian economy, which was then referred to as ‘caged tiger’, was unshackled. India opened its doors to foreign investments and an era of ‘liberalization’, as it was popularly coined, kick-started. The foreign exchange reserves responded and started picking up after the implementation of the reform policies. By May 2008 the reserves had peaked to $314.61 million.
1993 was a crucial year for the Indian rupee for it was freed from its fixed exchange rate regimen. The rupee had been set free to be determined by market sentiments. However, a provision was made by the policy makers for the intervention of the Reserve Bank should a need arise to check any extreme volatility. The rupee traded at the rate of Rs 31.50 in this period.
In the decade 2000-2010 the rupee hovered between 40 and 50. The year 2007 recorded the high for the rupee when it robustly stood at Rs 39 against the dollar. 2008 brought bad news and difficult times for the economy as the world was hit by another crisis. Last two years have seen severe beating to the rupee. Rising oil import bill of India, sluggish domestic equities and lack of confidence amongst the foreign investors have contributed to the current period of volatility. The last two years have especially been difficult with the rupee breaching the Rs 64 mark. This has further fuelled inflation and the economic growth which was once touted to reach double digit percentile was struggling to keep a 5% growth rate. The 66 years of Indian independence has seen more than 60 times depreciation of the rupee.
Managing volatility in the currency markets has become a big challenge for the economic policy makers in the country. The Reserve Bank as well as the government of India has taken a series of measures to curb the volatility in the markets. The government is now exploring structural measures to narrow the current account deficit, Finance Minister P Chidambaram said, adding that there is no plan to introduce capital controls.