The Story Of The Falling Rupee
August 22, 2013 3 Comments
Even after independence in 1947,the Indian Rupee was still pegged to the British Pound. The peg to the Pound was at INR 13.33 to a Pound which itself was pegged to USD 4.03. That means, officially speaking the USD to INR rate would be closer to Rs 4. In 1966,the Rupee was devalued and was now directly pegged to the US dollar at INR 7.50 per Dollar. Till 1966, the Indian currency, which was pegged to the British pound, was an officially or unofficially acceptable tender over a large part of Asia and Africa, from Beirut to Hong Kong.After the devaluation, the Rupee suddenly turned a global pariah, with few takers anywhere.Exports did not surge as expected and Indian financial prestige suffered even further.
By 1985, India had started having balance of payments problems. The rupee had by then been depreciated to about 17/$ in the intervening 2 decades,By the end of 1990, the country was facing a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance three weeks’ worth of imports. India had to airlift its gold reserves to pledge it with International Monetary Fund (IMF) for a loan.In 1991,overnight the Rupee was devalued by another 50% from about 17/$ to about 25/$. In 1993,the government allowed the Rupee to be traded by traders without a forced peg and it started to slide as the government was no longer controlling the prices, fully and started to reflect the reality. From about 27/$ it slid to Rs.35/$ by 1997.
Due to the Asian financial crisis of ’97 ,from Rs. 35/$, Rupee went down to Rs.39/$ as investors were quitting Asia en masse,The due to Pokhran-II the exchange rate became Rs.48/$ due to sanctions. Then because of the innate strength of the Indian economy the, Rupee started recovering its losses and started moving up and reached about 39/$ by 2007.The financial crisis of 2007-2008 caused investors to quit all emerging markets like India and pushed the Rupee from 39/$ to Rs.51/$ by March 2009. In the next 2 years, upee recovered most of the loss due to economic optimism and rebound in US markets.Then in late 2011 due to the European sovereign-debt crisis foreign investors started pulling out.A crisis ridden government was unable to give attention to the slowing economy and continued its profligate overspending and so the Indian rupee sunk from Rs. 44/$ in August 2011 to past 65/$ today.