History of Devaluation by India

8/20/2019 History of Devaluation by India

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Shri Vile Parle Kelvani Mandal’sMithibai College of Arts,, Chauhan Institute of Science &

Amrutben Jivanlal college of Commerce and Economics

Vile Parle (West) Mumbai 400056

EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the

project on “The History of Devaluation by India” submitted byKosha Deliwala, student of M.Com. – Part - I (Semester – II) for theacademic year 2015-16. This project is original to the best of ourknowledge and has been accepted for Internal Assessment.

Name & Signature of Internal Examiner

Name & Signature of External Examiner

PRINCIPAL

College Seal

DR. RAJPAL SHRIPAT HANDE Principal


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Shri Vile Parle Kelvani Mandal’sMithibai College of Arts,, Chauhan Institute of Science &

Amrutben Jivanlal college of Commerce and EconomicsVile Parle (West) Mumbai 400056

DECLARATION BY THE STUDENT

I, Kosha Deliwala, student of M.Com. (Part – I) Roll No.: 12 hereby declare that

the project titled “The History of Devaluation by India” for the subject

Economics submitted by me for Semester – II of the academic year 2015-16, is

based on actual work carried out by me under the guidance and supervision of

PROF. Jaison Thomas. I further state that this work is original and not submitted

anywhere else for any examination.

Place: Mumbai, Maharashtra

Date:

Name & Signature of Student

Kosha Deliwala


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ACKNOWLEDGEMENT

First and foremost I seek the blessings of my beloved TEACHERS who keep lot

of expectations on me and showering their infinite love for ever.

I would like to thank University of Mumbai for giving me this opportunity of

taking such a challenging project, which has enhanced my knowledge about the

History of Devaluation by India.

I show my gratitude to the Principal, Vice Principal and Co-ordinator of

Mithibai College who gave me a lot of moral support and under their guidance I

was successfully able to complete my project.

And with deep sense of gratitude I would like to thank Prof. Jaison Thomas for

his immense help and co-operation.


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Executive Summary

The Indian rupee, which was on a par with the American currency at the time of

Independence in 1947, has depreciated by a little more than 65 times against the

greenback in the past 66 years.

The rupee touched its historic record low of below 65 (intraday) against the dollar

last week on sluggish local stocks and continued dollar demand from importers.

The currency has witnessed huge volatility in the past two years. This volatility

became severe in the past three months affecting major macro-economic data,

including growth, inflation, trade and investment.

Managing volatility in the currency markets has become a big challenge for

policymakers. Despite of a series of measures taken by the central bank as well as

the government to curb the volatility in the markets, the rupee continues to

depreciate. The trend is unlikely to reverse any time soon.

This rupee depreciation is badly hurting the Indian economy. It is fuelling

inflation and has hurt economic growth.


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Research Methodology

Objectives of the research:

The main objectives of this study is:

•To understand the history of devaluation of the Indian currency by India

•To understand its impact on the country

Secondary Data:

The research includes detailed analysis of Secondary information. Various books, magazines,

blogs and research papers were referred to while collecting information. The sources have

been included in the Bibliography

Limitations of the Study:

The problem of selection of right information from various sources of available information

Scope of Study:

The study covers:

• Concept of Devaluation

• History

• Causes

• Impact

• Control Measures


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Content

Evaluation Certificate……………………………………..…………………………ii

Declaration……………………………………...……………………………………iii

Acknowledgement……………………………………………………………..……iv

Executive Summary………………………………………………………………...v

Research Methodology………………………………………………………………vi

Index

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A Devaluation of Indian Rupee in 1966 Z@

B Devaluation of Indian Rupee in 1991 Z8

^ Causes of Devaluation Z9

Y Impact of Devaluation ZZ

_ Control Measures ZA

8@ Conclusion Z^

88 Bibliography ZY


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1.0 Introduction

The Indian currency has witnessed a slippery journey since Independence. Many geopolitical

and economic developments have affected its movement in the last 66 years. When India gotfreedom on August 15, 1947, the value of the rupee was on a par with the American dollar.There were no foreign borrowings on India's balance sheet.

To finance welfare and development activities, especially with the introduction of the Five-Year Plan in 1951, the government started external borrowings. This required the devaluationof the rupee.

After independence, India had chosen to adopt a fixed rate currency regime. The rupee was pegged at 4.79 against a dollar between 1948 and 1966. Two consecutive wars, one withChina in 1962 and another one with Pakistan in 1965; resulted in a huge deficit on India's

budget, forcing the government to devalue the currency to 7.57 against the dollar.

The rupee's link with the British currency was broken in 1971 and it was linked directly to theUS dollar. In 1975, value of the Indian rupee was pegged at 8.39 against a dollar. In 1985, itwas further devalued to 12 against a dollar.

In 1991, India faced a serious balance of payment crisis and was forced to sharply devalue itscurrency. The country was in the grip of high inflation, low growth and the foreign reserveswere not even worth to meet three weeks of imports. Under these situations, the currency wasdevalued to 17.90 against a dollar.

1993 was very important. This year currency was let free to flow with the market sentiments.The exchange rate was freed to be determined by the market, with provisions of intervention

by the central bank under the situation of extreme volatility.

This year, the currency was devalued to 31.37 against a dollar. The rupee traded in the rangeof 40-50 between 2000 and 2010. It was mostly at around 45 against a dollar. It touched ahigh of 39 in 2007. The Indian currency has gradually depreciated since the global 2008economic crisis. Liberalising the currency regime led to a sharp jump in foreign investmentinflows and boosted the economic growth.


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Present Scenario

In the week gone by, the Indian rupee extended falls to a new low of 67.66 to the dollar as

heavy demand from importers along with weak domestic equities continued to weigh onsentiment.

Weakness was also seen after Federal Reserve minutes hinted that the United States was on

course to begin tapering stimulus as early as next month. Moreover, continuing its slide, the

rupee also made all time low against British pound and breached the 102-mark on local

bourses.

With this, British pound has become the first major foreign currency to cross 100 levels

against rupee.

However, steps taken by the RBI and the government to curb volatility in the exchange rate

have had little effect so far.

The government is now exploring structural measures to narrow the current account deficit,

Finance Minister Arun Jaitley said, adding that there is no plan to introduce capital controls.


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2.0 Meaning of Devaluation

'According to Efekpogua E. O. Devaluation' in modern monetary policy is a reduction in the

value of a currency with respect to those goods, services or other monetary units with which that

currency can be exchanged. "Devaluation" means official lowering of the value of a country's

currency within a fixed exchange rate system, by which the monetary authority formally sets a

new fixed rate with respect to a foreign reference currency.

In contrast, depreciation is used to describe a decrease in a currency's value (relative to other

major currency benchmarks) due to market forces, not government or central bank policy actions.

Under the second system central banks maintain the rates up or down by buying or selling foreign

currency, usually but not always USD. The opposite of devaluation is called revaluation.

Depreciation and devaluation are sometimes incorrectly used interchangeably, but they always

refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the

currency in goods and services (related to its purchasing power). Altering the face value of a

currency without reducing its exchange rate is a redenomination, not a devaluation or revaluation.


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2.1 Difference between Devaluation and Depreciation

Devaluation means official (government) lowering of the value of a country’s currency within

a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with

respect to a foreign reference currency.

Devaluation happens in countries with a fixed exchange rate. In a fixed-rate economy, the

government decides what its currency should be worth compared with that of other countries. The

government pledges to buy and sell as much of its currency as needed to keep its exchange rate

the same. The exchange rate can change only when the government decides to change it. If a

government decides to make its currency less valuable, the change is called devaluation. Fixed

exchange rates were popular before the Great Depression but have largely been abandoned for the

more flexible floating rates. China was the last major economy to openly use a fixed exchange

rate. It switched to a floating system in 2005.

Depreciation is used to describe a decrease in a currency’s value due to market forces, not

government or central bank policy actions.

Depreciation happens in countries with a floating exchange rate. A floating exchange rate means

that the global investment market determines the value of a country's currency. The exchange rate

among various currencies changes every day as investors reevaluate new information. While a

country's government and central bank can try to influence its exchange rate relative to other

currencies, in the end it is the free market that determines the exchange rate. As of 2012, all major

economies use a floating exchange rate. Depreciation occurs when a country's exchange rate goes

down in the market. The country's money has less purchasing power in other countries because ofthe depreciation.


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3.0 Brief History of the Devaluation of the Indian Rupee

From 1950 to 1973 Indian Rupee was linked to the British Pound. In 1966 and 1973

devaluation happened. On 24th September 1975, the connection between Indian rupee and

Pound was broken.

In 1975, the Rupee's ties to the Pound Sterling were disengaged. India established a float

exchange regime, with the Rupee's effective rate placed on a controlled, floating basis and

linked to a "basket of currencies" of India's major trading partners.

In 1993 Liberalized Exchange Rate Management System (LERMS) was replaced by theunified exchange rate system and hence the system of market determined exchange rate was

adopted. However, the RBI did not relinquish its right to intervene in the market to enable

and control the Indian currency.

Indian Rupee and its exchange rate historically –

Year Indian Rupees to 1 American

Dollar

1950 4.79

1955 4.79

1960 4.79

1965 4.77

1970 4.78

1975 7.561980 7.86

1985 12.36

1990 17.50

1995 32.42

2000 44.94

2005 44.09

2010 44 to 50


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6 June 1966

The India Rupee was devalued from an Official Rate of Rs4.76 to Rs7.50 per U.S. Dollar.

(WCY1990-1993, p.432) The rate listed since was the Official Rate.

28 May 1971

The Rupee was partially devalued, as taxes were placed on travel abroad, creating a Resident

Travel Rate. (WCY1990-1993, p.432)

23 August 1971

Following the floating of the U.S. Dollar on 08/15/1971, India announced that the Official

Rate of Rs7.50 per American unit would remain unchanged, thus effecting a de facto

devaluation and severing the Rupee's link to the Pound Sterling. (WCY1990-1993, p.432)

February 1973

Following the devaluation of the U.S. Dollar, the theoretical Official Rate of the Rupee was

realigned to Rs 6.55 per U.S. Dollar, based on the Indian currency's unchanged gold content.

(WCY1990-1993, p.432)

31 December 1974

Effective Rate: 8.08; Travel Rate: 9.29. (WCY 1984, p. 355)

1 January 1975

Following the expiration of the bilateral payments arrangements with Bangladesh, settlements

with that country were placed on a convertible currency basis. (IMF 1976, p.230)

30 January 1975

The Reserve Bank granted general permission to the public for (1) sending out of India not

more than two pieces each of the development-oriented design coins of Rs 50, Rs 10, and 10

paise for the purpose of making noncommercial gifts of such coins to nonresidents, and (2)

for taking out two pieces each of Rs 50 and Rs 10 by passengers going abroad, for purposes

of presentation. (IMF 1976, p.231)


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2 July 1975

The middle rate for the pound sterling was changed from Rs 18.90=£ 1 to Rs 18.60=£ 1; the

middle rate had remained unchanged since July 1972, the Reserve Bank's buying and selling

rates for sterling were revised from Rs 18.75 and Rs 18.85, respectively, per £ 1to Rs 18.55

and Rs 18.65 per £ 1.

The central rate remained unchanged at Rs 18.9677=£ 1, and India continued to avail itself of

wider margins. (IMF 1976, p.230)

25 August 1975

The Ministry of Finance announced additional measures to attract remittances from Indians

abroad.

(1) The opening of nonresident accounts in selected convertible currencies would be allowed.

(2)Nonresident Indians would be allowed to invest in Indian industry without undertaking

that they would repatriate neither capital nor dividends.

(3) The entire dividend income from units of the Unit Trust of India purchased by nonresident

Indians would be made tax free.

(4) Indian professionals going abroad or already staying abroad would be persuaded to enter

into a contract with the Government of India agreeing to remit 10 per cent of their earnings to

India through legal channels; this would be applicable to persons earning in excess of

US$12,000 a year. (IMF 1976, p.230)

1 September 1975

The Reserve Bank was prepared to purchase deutsche mark and Japanese yen forward also

for six months' delivery; previously, this facility was available only for one, two, and three

months' forward delivery.

In addition, forward sales of sterling, U.S. dollars, deustche mark, and Japanese yen by

authorized dealers of the Reserve Bank against their spot purchases of these currencies

became permissible. (IMF 1976, p.230)


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15 September 1975

Indians resident abroad, who had opened a Nonresident (External) Account by remitting

funds from abroad through banking channels and then returned to India, could, on the merits

of the case, obtain permission from the Reserve Bank

(1) to reconvert the balance into foreign currency when leaving India within three years of

their return;

(2) to reconvert the resident account into a Nonresident (External) Account after departure

from India within three years, provided no local rupee credits had been made into the account

in the meantime; or

(3) to open a new Nonresident (External) Account, after departure from India within three

years (up to the value of the balance at the time of initial conversion of the account into a

Resident Account). The facilities were not available to Indians employed abroad with and

Indian-owned organization. (IMF 1976, p.230)

24 September 1975

The Rupee's ties to the Pound Sterling were broken, and the Indian unit's Effective Rate was

placed on a controlled, floating basis linked within margins of 5% to a "basket of currencies"

that included the Japanese Yen, the West German Mark and the U.S. Dollar.

The fluctuation range for the Effective Travel Rate was revised, as the travel taxes of 10%-

15% were unified into a 12.5% rate. (WCY1990-1993, p.432) The rate listed since was the

Effective Rate.

28 October 1975

Authorized dealers were required to obtain the prior approval of the Reserve Bank before

granting loans or overdrafts to nonresident persons of Indian nationality or of Indian origin

against the security of fixed deposits created solely out of remittances from abroad (including

balances held in Nonresident (External) Accounts or Foreign Currency (Nonresident)

Accounts); the authority to grant such credit up to Rs 20,000, subject to certain conditions,

was revoked. (IMF 1976, p.230)

1 November 1975

A new type of nonresident account, Foreign Currency (Nonresident) Accounts, wasintroduced. Nonresident persons of Indian nationality or origin could open accounts in


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designated foreign currencies (pounds sterling and U.S. Dollars) for remittance of their

savings from abroad. Interest was paid in the currencies in which the accounts were held and

was free of Indian income tax.

The balances, including interest, were repatriable at any time in the same currencies, without

reference to the Reserve Bank. Balances could only be held as term deposits, for periods

ranging from 91 days to 61 months. The exchange risk was borne by the Reserve Bank.

The opening of, and operations on, the accounts were governed by the Nonresident (External)

Accounts Rules, 1970.

The facilities of this Foreign Currency (Nonresident) Accounts scheme were not available to

persons resident in Bilateral Account Countries. (IMF 1976, p.230)

The Asian Clearing Union began operations. At the option of the payor or payee, payments

and receipts for current transactions (other than those relating to petroleum, natural gas, and

their products) to and from Bangladesh, Iran, Pakistan, and Sri Lanka could be settled in

Asian monetary units, one unit being equivalent to SDR 1.

The arrangements were not applicable to settlements between India and one member of the

Union, Nepal. (IMF 1976, p.230) The Reserve Bank stood ready to sell Asian monetary units

spot to authorized dealers and to purchase them from authorized dealers for spot and forward

delivery for periods up to 3, 6, and 9 months (extendable up to 12 months).

The value of the unit for the first accounting period in November 1975 was set at a middle

rate of 1 Asian monetary unit = Rs 10.4991.

The charge on forward purchases of the unit by the Reserve Bank was Rs 0.02 per unit for the

three months. Authorized dealers were permitted to extend forward cover to exporters in

Asian monetary units where export orders were expressed in these units or in the currency of

the importing member country of the Clearing Union. (IMF 1976, p.234)


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5 December 1975

The middle rate for sterling was changed to Rs 18.1284=£ 1. (IMF 1976, p.234)

29 December 1975

The Reserve Bank issued a clarification for the tax liabilities attaching to Nonresident

(External) Accounts and Foreign Currency (Nonresident) Accounts. Both types of account

were exempt from income tax in respect of interest accruing on the balances and wealth tax in

respect of the balances held, but not from either estate duty of gift tax. (IMF 1976, p.234)

8 March 1976

The middle rate of sterling was changed to Rs 17.75 = £ 1. (IMF 1977, p.229)

29 September 1976

The middle rate of sterling was changed to Rs 14.70= £ 1. (IMF 1977, p.231)

24 December 1976

The middle rate of sterling was changed to Rs 15.20= £ 1. (IMF 1977, p.232)

31 December 1976

Travel Rate: 9.99. (WCY 1984, p. 355)

24 May 1977

The Reserve Bank directed authorized dealers to discontinue the rediscounting of foreign

currency usance bills abroad. (IMF 1978, p.205)

15 June 1977

The obligation to surrender to an authorized dealer any foreign exchange held by persons

resident in India was extended to all currencies except those of Nepal and Bhutan. (IMF

1978, p.205)

16 August 1977

The Reserve Bank's procedures governing forward purchases of pounds sterling, U.S.

Dollars, deutsche mark, and Japanese yen from authorized dealers were revised. Under thenew system, the Bank would purchase pounds sterling spot and also for forward delivery on


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any day during the first month, the second month and so on up to the ninth month.

The U.S. Dollar, the deustche mark, and the Japanese yen would also be purchased spot as

well as forward for delivery on any day during the first month, the second month, and so on

up to the sixth month. (IMF 1978, p.205)

1 September 1977

The Foreign Exchange Regulation Act, 1973 was extended to the State of Sikkim.

Accordingly, residents of Sikkim (other than foreign nationals who are temporarily resident

there) who own foreign exchange or foreign securities or immovable property outside India

were required to declare to the Reserve Bank particulars of all such holdings before

November 1.

The holders of foreign currency balances, except for certain exempted categories, were

required to surrender such balances to an authorized dealer in foreign exchange before

December 1. (IMF 1978, p.206)

29 September 1977

Blocked accounts of Indian emigrants were redesigned ordinary nonresident accounts. (IMF

1978, p.206)

1 November 1977

The Reserve Bank introduced a new scheme entitled Returning Indians Foreign Exchange

Entitlement Scheme, for persons of Indian nationality or origin returning to India for

permanent settlement.

Under the scheme, such persons could apply for release of 25 per cent of the foreign

exchange brought in or remitted to India through normal banking channels, and also of the

balances held in rupee Nonresident (External) Accounts and Foreign Currency Nonresident

Accounts, for specified purposes for which foreign exchange was not normally made

available.

Entitlements under the scheme would remain valid for ten years from the date of return of the

head of the family to India. (IMF 1978, p.206) India adjusted the exchange rates of the rupeeagainst the pound sterling. The new buying and selling rates were Rs 15.7 = £ 1 and Rs 15.8


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= £ 1, respectively. (IMF 1978, p.206)

1 January 1978

Transactions between India and Hungary were placed on a convertible currency basis. (IMF

1979, p.206)

24 May 1978

The spot buying and selling rates of the rupee in terms of the pound sterling were adjusted to

Rs 15.30 and Rs 15.40, respectively, per £ 1. The forward rates from one to nine months were

adjusted accordingly.

During the course of the year the spot buying and selling rates and the forward rates were

adjusted on a number of occasions. On December 20 the spot rates were Rs 16.45 buying, and

Rs 16.55 selling, per £ 1. (IMF 1979, p.207)

1 June 1978

The Reserve Bank delegated additional powers to authorized dealers in respect of payments

for commission on exports covered by irrevocable letters of credit, advertising expenses

(where the limit was raised from US$500 to US$1,000 in any calendar year), and sundry

trade-related remittances. Authorized dealers were permitted to effect remittances on account

of private imports up to a limit of Rs 500 c.i.f. (IMF 1979, p.207)

23 July 1978

Exchange bureaus and authorized money changers were authorized to sell foreign currency

notes and coin up to the equivalent of Rs 200 to travelers proceeding abroad except to

Bangladesh, Bhutan, and Nepal; travelers visiting Bangladesh were entitled to Rs 100. (IMF

1979, p.207)

1 September 1978

Following the expiry of the rupee trade agreement between India and Afghanistan,

transactions with Afghanistan were placed on a convertible currency basis. (IMF 1979, p.207)

The Reserve Bank extended its facilities for forward purchases of U.S. Dollars from up to 6

months to up to 12 months.


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The forward margins on sterling transactions were raised slightly. The Reserve Bank limited

to 1 month the authorized dealers' facility for forward delivery of sterling and U.S. Dollars

against spot purchases of these currencies from their overseas branches and for

correspondents.

The Reserve Bank extended the scope of the long-term forward cover scheme (in operation

since 1974) to include additional engineering items. (IMF 1979, p.207)

5 October 1978

Authorized dealers were permitted to open letters of credit in a convertible currency against

imports from Pakistan, subject to normal exchange control regulations being observed. (IMF

1979, p.207)

13 January 1979

The Reserve Bank announced that with effect from November 25, 1978 a rate for the ruble of

rub 1 = Rs 10 had been established (instead of rub 1 = Rs 8.333) for commercial contracts

which had been or might be denominated in rubles, except that in respect of commercial

contracts concluded prior to November 24, 1978 then new exchange rate would apply only to

the outstanding contract value, as well as to the outstanding payment obligations on that date.

The ruble-rubee rate would be subject to revision from time to time; there would be no gold

clause in any future contracts between parties in the two countries. With effect from June 16,

1979 and August 11, 1979 the ruble-rupee exchange rate was adjusted to rub 1=Rs 9.6938

and rub 1= Rs 9.9974, respectively. (IMF 1980, p.198)

30 January 1979

The exchange rate margins were increased from 2.5 per cent on either side of the middle rate

to 5 per cent. (IMF 1980, p.198)

13 March 1979

The spot buying and selling rates for the pound sterling were changed to correspond to a

middle rate of Rs 16.80 per £ 1. Thereafter, there spot rates were changed frequently and on

December 4, 1979 the middle rate was Rs 17.80 per £ 1. Forward rates fjor one to nine

months were adjusted accordingly. (IMF 1980, p.198) 20 June 1979Authorized dealers were permitted, without prior approval, to allow remittances of dividends on equity shares to


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nonresidents where the equity shares would not exceed Rs 500,000 at face value of 25 per

cent of the total issued equity capital, whichever was less. (IMF 1980, p.198)

7 August 1979

Foreign persons of Indian origin, and their foreign-born wives, resident in India for

employment of a specified duration or for carrying out an assignment of a duration not

exceeding three years would be eligible for exemption from the requirement of surrender of

foreign exchange and might, in the same way as foreign nationals of non-Indian origin,

maintain accounts in foreign currency, hold foreign securities, etc. (IMF 1980, p.199)

8 August 1979

Authorized dealers were permitted, without prior approval, to remit registration fees for

medical, scientific, and technological conferences up to a limit of US$300. Authorized

dealers might release US$500 to students at graduate or postgraduate levels provided they

had secured a scholarship, an assistantship, etc., to meet the entire tuition and maintenance

expenses. (IMF 1980, p.199) Authorized dealers were permitted to sell foreign exchange up

to Rs 300 and Rs 400, respectively, to Indian nationals and persons of Indian origin resident

in India, for travel to Bangladesh and Sri Lanka once in a calendar year. (IMF 1980, p.199)

26 September 1979

The scope of the facility available to Indian nationals and persons of Indian origin returning

to India with a view to securing employment in India was extended to include most persons

of Indian origin, irrespective of qualifications and background. In addition, the recon version

facility was extended from three to five years. (IMF 1980, p.199)

9 January 1980

The spot buying and selling rates for the pound sterling in terms of the rupee were changed to

correspond to a middle rate of Rs 18.00 per £ 1. Thereafter, the rates were changed on a

number of occasions, and on November 29, 1980, the middle rate was Rs 18.85 per £ 1.

Forward rates for one to nine months were adjusted accordingly. (IMF 1981, p.212)

5 April 1980

The ruble-rupee exchange rates were revised to rub 1=Rs 9.6378. (IMF 1981, p.212)


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30 May 1980

With effect from June 12, the practice of basing rates for spot and forward purchases of

deustche mark, Japanese yen, and U.S. dollars on the previous working day's London closing

rates was modified and, henceforth, would be based on the latest available rates and trends in

international foreign exchange markets. The rates would be announced every day and may be

changed at any time, if the need arose. (IMF 1981, p.212)

26 September 1980

Authorized dealers were instructed to keep specified quotations for ready clean telegraphic

transfers in various currencies, other than the pound sterling, with maximum spreads varying

from 1 per cent to 2.5 per cent from the mean telegraphic transfer rate. (IMF 1981, p.213)

10 November 1980

The ruble-rupee exchange rates were revised to rub 1=Rs 9.3407. (IMF 1981, p.212)

1 January 1981

The trade and payments agreement between Indian and Romania was renewed for a period of

five years. Payments for transactions between the two countries would continue to be made in

nonconvertible Indian rupees. (IMF 1982, p.230) The trade and payments agreement between

Indian and Poland was renewed for a period of five years. Payments for transactions between

the two countries would continue to be made in nonconvertible Indian rupees. (IMF 1982,

p.230) The trade and payments agreement between Indian and the German Democratic

Republic (GDR) was renewed for a period up to December 31, 1985. Payments for

transactions between the two countries would continue to be effected in nonconvertible

Indian rupees. (IMF 1982, p.231)

12 February 1981

Authorized dealers were allowed to open rupee accounts on their books in the names of their

branches or correspondents in Pakistan and the People's Republic of China without prior

reference to the Reserve Bank. Such accounts should be used to finance permissible

transactions in terms of provisions contained in the Exchange Control Manual and other

relevant instructions by the Reserve Bank. Authorized dealers must, however, seek directions

from the Reserve Bank before opening accounts in the names of branches of Pakistani andChinese banks operating outside Pakistan and the People's Republic of China, respectively.


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3 March 1981

Authorized dealers were required to obtain the approval of the Reserve Bank before opening

letters of credit for financing purchases of goods abroad for on-sale abroad. To expedite

business, authorized dealers were permitted to approve such transactions subject to specified

conditions. (IMF 1982, p.231)

28 July 1981

The Reserve Bank advised its offices to apply stricter scrutiny concerning the release of

foreign exchange for foreign business travel other than export promotion. (IMF 1982, p.232)

22 September 1981

It was announced that with effect from October 1, 1981, the Reserve Bank would change its

exchange rate quotations from a "ready" or "cash" basis to a "spot" basis (delivery after two

business days); however, in order to help authorized dealers and customers, quotations on a

"cash" basis would be applied in exceptional cases and for valid reasons upon applications

from authorized dealers. (IMF 1982, p.232)

15 October 1981

A license to deal in foreign exchange in India has been granted by the Reserve Bank to

Banque de l'Indochine et de Suez (INDOSUEZ), France, in terms of which the Bank could

take all types of foreign exchange transactions in all permissible currencies at its branch in

Bombay. (IMF 1982, p.232)

6 February 1982

The "notional" exchange rates at which authorized dealers are required to sell to and

repurchase from the Reserve Bank proceeds of deposits in Foreign Currency (Nonresidents)

Accounts were changed to £ 1 = Rs 16.50 and US$1= Rs 8.75. (IMF 1983, p.252)

3 March 1982

The Export-Import Bank of India was authorized to undertake, in all permitted currencies,

specified types of foreign exchange transactions incidental to the Bank's normal operations.

(IMF 1983, p.252)


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22 March 1982

The Export-Import Bank of India was authorized to undertake, in all permitted currencies,

specified types of foreign exchange transactions incidental to the Bank's normal operations.

(IMF 1983, p.252)

22 March 1982

The Reserve Bank suspended, until further notice, spot purchases of deutsche mark acquired

by authorized dealers from their overseas branches, head offices, or correspondents for the

purpose of funding their rupee accounts in India. (IMF 1983, p.252)

7 April 1982

The floor on buying rates and the ceiling on selling rates for U.S. dollar notes were changed

to Rs 9.00 =US$1 and Rs 9.80=U.S. $1, respectively. (IMF 1983, p.252)

21 June 1982



25 June 1982

The ruble-rupee exchange rate was revised to rub 1= Rs 9.6997. The floor on buying rates

and the ceiling on selling rates for U.S. dollar notes were changed to Rs 9.00 =US$1 and Rs

9.80=U.S. $1, respectively. (IMF 1983, p.253)

The rupee value of the special currency basket, applicable to contracts concluded under the

Deferred Payments Protocol dated April 30, 1981 between the Government of India and the

U.S.S.R., relating to deliveries of machinery and equipment from U.S.S.R. to India, was

revised to Rs 10.2518. The floor on buying rates and the ceiling on selling rates for U.S.

dollar notes were changed to Rs 9.00 =US$1 and Rs 9.80=U.S. $1, respectively. (IMF 1983,

p.253)

30 September 1982




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17 November 1982

The exchange rates at which authorized dealers were required to sell and repurchase from the

Reserve Bank proceeds of deposits in foreign currency nonresident account scheme were

changed to £ 1 = Rs 16.00 and US$1 =Rs 9.15. (IMF 1983, p.253)

19 November 1982

The floor on buying rates and ceiling on selling rates for U.S. Dollar notes were changed to

Rs 9.50 =US$1 and Rs 9.90 = US $1, respectively. (IMF 1983, p.253)

1 January 1983

The ruble-rupee exchange rate was revised to rub 1=Rs 10.0176. The rupee value of the

special currency basket used for valuation of contracts under the Deferred Payments Protocol

dated 04/31/1981 between the Government of India and the U.S.S.R. , for delivery of

machinery and equipment from the U.S.S.R. to India, was revised to Rs 10.5878. (IMF 1984,

p.254)

31 January 1983

The "notional" exchange rate for U. S. dollar at which authorized dealers were required to sell

and repurchase from the Reserve Bank proceeds of deposits in Foreign Currency

(Nonresident) Accounts was changed to US$1= Rs9.75. (IMF 1984, p.254)

5 April 1983

The "notional" exchange rate for the pound sterling at which authorized dealers were required

to sell and repurchase from the Reserve Bank proceeds of deposits in Foreign Currency

(Nonresident) Accounts was changed to &pound1= Rs14.50. (IMF 1984, p.254)

3 June 1983

The "notional" exchange rate for the pound sterling at which authorized dealers were required

to sell and repurchase from the Reserve Bank proceeds of deposits in Foreign Currency

(Nonresident) Accounts was changed to &pound1= Rs15.50. (IMF 1984, p.254)

5 January 1984

The exchange rates for purchases and sales by authorized dealers under the Foreign Currency Nonresident Accounts (FCNR) scheme were set at Rs 15=&pound1 and Rs10=US$1,


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respectively. (IMF 1985, p.265)

4 June 1984

The exchange rate for purchases and sales by authorized dealers under the FCNR scheme was

changed to Rs11=US$1. (IMF 1985, p.265)

29 October 1984

A new exchange rate of Rs12=US$1 was introduced for purchases and sales of U.S. dollars

by authorized dealers under the FCNR scheme. (IMF 1985, p.265)

24 January 1985

Maintenance of ECU-denominated balances and positions abroad by authorized dealers was

permitted, and Indian importers and exporters were allowed to use the ECU as a unit of

account in concluding contracts and in settlement of transactions with their overseas

counterparts. (IMF 1986, p. 289)

1 March 1985

It was announced that the Reserve Bank would henceforth purchase the pound sterling at the

revised notional rate of &pound1= Rs14, and the U.S. dollar at US$1=Rs 13, under the

Foreign Currency Nonresident Accounts (FCNR) Scheme. (IMF 1986, p. 289)

11 April 1985

A revised notional rate of &pound1=Rs 15 was introduced at which the Reserve Bank would

purchase pounds sterling under the FCNR scheme. (IMF 1986, p. 289)

10 July 1985

A revised notional rate of &pound1=Rs 16 was introduced at which the Reserve Bank would

purchase pounds sterling under the FCNR scheme. (IMF 1986, p. 289)

1 August 1985 The Reserve Bank began to announce, on a daily basis, its buying and selling

rates for the currencies of the member countries of the Asian Clearing Union (ACU). (IMF

1986, p. 289)


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16 October 1985

It was announced that the Reserve Bank would henceforth purchase pounds sterling under the

FCNR Scheme, at the revised notional rule of &pound1=Rs 17, and the U.S. dollar at

US$1=Rs 12. (IMF 1986, p. 289)

2 February 1987

The Reserve Bank of India started selling U.S. Dollars for spot delivery to authorized dealers

subject to the condition that

(1) the Reserve Bank would sell a minimum of US$250, 000 (subsequently reduced to

US$100,000 with effect from 07/21/1987) and higher amounts in multiples of US$25,000

without a ceiling; and

(2) the U.S. dollars purchased from the Reserve Bank would only be used to settle

specifically approved transactions or commitments in U.S. dollars, such as remittances to be

made on account of imports, dividends, profits, royalty, and technical know-how fees, from

India in conformity with existing Exchange Control Regulations. (IMF 1988, p.256)

15 October 1987

Indians receiving foreign exchange for travel were required to pay a Foreign Exchange

Conservation Tax at 15% of the Rupee equivalent. As a result, a Travel Rate was again

established. (WCY1990-1993, p.432)

31 December 1987

Travel Rate: 14.81(WCY1988-1989, p.443)

31 December 1988

Travel Rate: 17.191 (WCY1990-1993, p.436)

31 December 1989

Travel Rate: 19.590. (WCY1990-1993, p.436)

31 December 1990

Travel Rate: 20.784. (WCY1990-1993, p.436)


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1 July 1991

The Rupee was devalued by 9.29%. (WCY1990-1993, p.432)

3 July 1991

The Rupee was cut by 11.3%, bringing the rate to Rs25.95 per U.S. Dollar. (WCY1990-1993,

p.432)

1 March 1992

A dual rate system was created.

The Effective Rate would govern only certain import payments, 40% of export and invisibles

receipts and official grants and IMF transactions. All other dealings would come under an

Interbank Free Rate determined by supply and demand in the interbank market. (WCY1990-

1993, p.432)

27 March 1992

Authorized dealers were permitted to offer forward cover for all transactions permitted under

the exchange control regulations. (IMF 1993, p.241)

1 June 1992

The travel tax and the Foreign Exchange Conservation Tax were abolished, eliminating the

Travel Rate. (WCY1990-1993, p.432)

1 March 1993

The rate system was unified at the Interbank Free Rate and the Rupee was fully convertible.

(WCY1990-1993, p.432).

All foreign exchange transactions would be conducted by authorized dealers at market-

determined rates.

Authorized dealers would not be required to transfer to the Reserve Bank any portion of

foreign exchange that was surrendered to them by exporters of goods and services. (IMF

1994, p. 235) The rate listed since was the Interbank Free Rate.

1 April 1993

The Reserve Bank ceased to provide exchange rate guarantees on new foreign currencynonresident accounts with a maturity of less than one year. (IMF 1994, p. 235)


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1 October 1993

The Reserve Bank ceased to provide exchange rate guarantees on new foreign currency

nonresident accounts with a maturity of less than two years. (IMF 1994, p. 235)

30 December 1995

Exchange Rate - 35.180

12 June 1998

Authorized dealers were permitted to provide forward cover to foreign institutional investors

in respect of their fresh investments in India in equity.

Authorized dealers also were allowed to extend forward cover facility to foreign institutional

investors to cover the appreciation in the market value of their existing investments in India.

This facility has also been extended to NRIs and OCBs to cover their portfolio equity

investments. Authorized dealers are allowed to extend forward cover to holders of Foreign

Currency Nonresident / Nonresidents Foreign Exchange accounts to enable them to hedge

balances in such accounts. (IMF 1999, p. 414)

20 August 1998

Authorized dealers were allowed to offer forward cover facility to foreign institutional

investors to the extent of the value of their investments. (IMF 1999, p. 415)

21 March 1999 Authorized dealers were allowed to offer forward exchange cover to foreign

institutional investors to the extent of 15% of their outstanding equity investment. (IMF 2000,

p.426)

October 2010

44 to 50 Indian Rupees equal to 1 American dollar.

Updated on Monday, February 29th

, 2016

1 Dollar = Rs.67.72 Indian Rupees


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4.0 Devaluation of Indian Rupee in 1966

Despite government attempts to obtain a positive trade balance, India suffered a severe balance of

payments deficits since the 1950s. Inflation had caused Indian prices to become much higher than

world prices at the pre-devaluation exchange rate.When the exchange rate is fixed and a country

experiences high inflation relative to other countries, that country’s goods become more

expensive and foreign goods become cheaper.

Therefore, inflation tends to increase imports and decrease exports. Since 1950, India ran

continued trade deficits that increased in magnitude in the 1960s. Another additional factors

which played a role in the 1966 devaluation was India’s war with Pakistan in late 1965. The USand other countries friendly towards Pakistan, withdrew foreign aid to India, which further

necessitated devaluation. Because of all these reasons, Government of India devalued Rupee by

36.5% against Dollar.


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5.0 Devaluation of Indian Rupee in 1991

In 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of

a basket of currencies of major trading partners. At the end of 1990, the Government of India

found itself in serious economic trouble. The government was close to default and its foreign

exchange reserves had dried up to the point that India could barely finance three weeks’ worth of

imports.

In July of 1991 the Indian government devalued the rupee by between 18 and 19 percent. The

government also changed its trade policy from its highly restrictive form to a system of freely

tradable EXIM scrips which allowed exporters to import 30% of the value of their exports.

6.0 Chronology of India’s Exchange Rate Policies

1947 (When India became member of IMF): Rupee tied to pound, Re 1 Rupee = 1 Pound

1949: Pound devalued; India maintained par with pound

1966: Rupee was devalued by 36.5%. At that time Rs 4.76 = $1, after devaluation it became Rs

7.50 = $1

1967: UK devalued pound, India did not devalue

August 1971: Rupee pegged to gold/dollar, international financial crisis

December, 1971: Dollar is devalued

December, 1971: Rupee is pegged to pound sterling again

1971-1979: The Rupee is overvalued due to India’s policy of import substitution

1972: UK floats pound, India maintains fixed exchange rate with pound

1975: India links rupee with basket of currencies of major trading partners. Although the basket

is periodically altered, the link is maintained until the 1991 devaluation.

1991: Rupee devalued by 18-19 %

1992: Dual exchange rate, LERMS, Liberalised Exchange Rate Management System

1993: Unified exchange rate: $1 = Rs 31.37

1993/1994: Rupee is made freely convertible for trading, but not for investment purposes


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7.0 Causes of Devaluation

Lack of competitiveness / inflation.

The long term decline in the value of the Rupee reflects India’s relative decline in

competitiveness. In particular, India has a higher inflation rate than its international competitors.

In November 2013, Indian inflation reached 11.24%. Therefore, there is relatively less demand

for the rising price of Indian goods; this reduction in demand causes a fall in the value of the

Rupee.

Current account deficit.

A consequence of poor competitiveness and high demand for imports is a current account deficit.

This means India is purchasing more imports of goods and services than it is exporting. A large

current account deficit tends to put downward pressure on a currency. This is because more

currency is leaving the country to buy imports than is coming in to buy exports.

In the first quarter of 2013 the Current Account Deficit was 18.1 billion. The deficit was over

6.7% in last quarters 2012, the deficit has fallen to 1.2% in Q3 2013. However, the Economist

notes that 75% of the deficit reduction is artificially related to reducing imports of gold through

government restrictions. (See: Indian economy 2014) Therefore, there is still an underlying trade

deficit, India will need to work on through increasing exports and competitiveness.

A current account deficit can be financed by capital inflows (on the financial account). But,

recently, India has been struggling to attract sufficient long-term capital investment. Some major

companies have recently pulled out of foreign direct capital investment. This puts more

downward pressure on the Rupee.

Oil Prices

India is a net importer of oil. It has to buy oil in dollars. Therefore, rising oil prices worsen India’s

current account and also weaken the Rupee. More Indian’s Rupee’s have to be spent on buying

oil.


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8.0 Impact of Devaluation

Effect on

If Rupee DEPRECIATES

(For example, when US$-INR moves

from Rs.50/- to Rs55/)

If Rupee APPRECIATES

(For example, when US$-INR

moves from Rs50/- to Rs 47/-)

Importers Imports become costly as for each

USD we have to pay Rs5/- more.

IMPORTS BECOME COSTLIER

Imports become cheaper as for each

USD we have to pay Rs3 less.

IMPORTS BECOME CHEAPER

Exporters Exporters will have higher revenue.

For exports of each Dollar, the

exporter will get Rs 5 higher.

EXPORTERS EARN MORE

Exporters will earn lower revenue.

For exports of each dollar, now the

exporter will get Rs 3 less.

EXPORTERS EARN LESS

Indians Who Wish to Go

on Holidays Abroad

For each dollar taken abroad for

spending, the traveller has to pay Rs 5more and thus his trip will become

costlier. TRIP IS COSTLIER

For each dollar he intends to

take abroad for spending, thetraveller has to pay Rs3 less and

thus his trip will become cheaper.

TRIP IS CHEAPER

Inflationary pressures

India is trying to control inflation, which has been running into double digits. But, devaluation

makes itself makes it harder to control inflation. The devaluation increases the price of imports,

such as oil and fuels, leading to cost push inflation. Also, devaluation is considered an ‘easy’

way of restoring competitiveness, therefore devaluation may reduce the incentives for exporters

to work on improving long-term competitiveness. Finally, devaluation can help boost domestic

demand. Exports will rise and consumers will switch to domestic producers rather than imports.

This can cause demand-pull inflation.


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Economic growth

A devaluation can boost domestic demand and short-term economic growth. However, this is

not necessarily helpful for the Indian economy. India’s economy needs to concentrate on boosting productivity and long term productive capacity, rather than relying on boosting

domestic demand. The rapid devaluation has also caused a loss of confidence in international

and domestic investors. With a history of quick depreciation, foreign investors will be more

nervous of investing in India. The devaluation and inflationary impact will also discourage

domestic investors, e.g. firms worried about future oil prices. This reduction in investment is

damaging to long-term economic growth.

Devaluation spiral

The concern is that high Indian inflation causes devaluation, which in turn feeds into more cost-

push inflation. Thus it becomes a difficult to escape out of this unwelcome negative spiral of

inflation-devaluation-inflation.


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9.0 Control Measures

1. Measures by RBI:

a. Using Forex Reserves:

RBI can sell forex reserves and buy Indian Rupees leading to demand for rupee. But using forex

reserves poses risk also, as using them up in large quantities to prevent depreciation may result in a

deterioration of confidence in the economy's ability to meet even its short-term external obligations.

And not using reserves to prevent currency depreciation poses the risk that the exchange rate will

spiral out of control. Since both outcomes are undesirable, the appropriate policy response is to find

a balance.

b. Raising Interest Rates:

The rationale is to prevent sudden capital outflows and ultimately lead to higher capital inflows. But

India’s interest rates are already higher than most countries. This was done to tame inflationary

expectations. So, further raising interest rates would lead to lower growth levels.

c. Make Investments Attractive:

Easing Capital Controls: RBI can take steps to increase the supply of foreign currency by expanding

market participation to support Rupee. RBI can increase the FII limit on investment in government

and corporate debt instruments. It can invite long term FDI debt funds in infrastructure sector. The

ceiling for External Commercial Borrowings can be enhanced to allow more ECB borrowings.


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2. Measures by Government

Government should take some measures to bring FDI and create a healthy environment for

economic growth. Key policy reforms that should be initiated includes rolling of Goods and

Services Tax (GST), Direct Tax Code (DTC), FDI in aviation and retail, Companies Bill and diesel

decontrol. Efforts should be made to invite FDI but much more needs to be done especially after the

holdback of retail FDI and recent criticisms of policy paralysis. The government took steps recently

to loosen rules for portfolio investment in the Indian market, indicating its desire to sustain external

inflows. The measure to increase External Commercial Borrowings (ECB) to $10bn will help in

borrowing in dollar at a less cost. It may take similar steps to encourage FDI as well, helping sustain

external funding.


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10.0 Conclusion

We can’t predict where the rupee will eventually land and I don’t think anyone else can either.

Of course, we are not the only country at the mercy of the dollar because almost every emerging

market is suffering. But surely, that shouldn’t be any consolation.

The rupee has depreciated about 50 percent in the past three years and 15 percent this year. The

situation is extremely worrying for us because of the debilitating impact it will have on India’s

economy that have been pushed to the brink by global factors.

In India, there is a sense of despondency in the wake of policy announcements that haven’t really

been executed. There is a sense of loss of credibility. It is unfortunate that these strains have

surfaced in the midst of a change of guard at the Reserve Bank of India (RBI).

Sadly, we can’t say we did not see it coming. The RBI has been pointing to the twin deficits – fiscal

and trade – for long while waging a losing battle on the monetary front. The International Monetary

Fund (IMF) pointed out early this year that our fiscal deficit and inflation were among the highest in

emerging markets. Our dependence on hot FII portfolio money was always there for all to see.

Our government, the markets and the rupee hid behind a huge wall of liquidity in the global

markets. Looking back, it almost seems as though the RBI commenced its interest reduction cycle a

bit too early and the outgoing governor did not wish to leave without correcting what he may believe was an error in policy judgment.

The fall in the rupee is a mere manifestation of the deeper malaise – high inflation, low interest rates

combined with low growth.

Also, we should open up incoming FDI for all sectors, except those considered sensitive to national

interests. Especially for infrastructure, capital-intensive and environmentally safe projects.

We do not see anything wrong in heavily taxing imports of luxury consumables and durables; and preventing low-value imports that can be produced locally. Given our vulnerabilities in coal and oil-

based energy, pretending that we can do away entirely with capital controls is utopian.

While NREGA and food security can be justified, inflation led by fiscal deficit has to be controlled

by eliminating indirect subsidies and freeing up agricultural trade. To revive the rupee, we need to

rein in the twin deficits. At the same time, painful as it may seem, we need to hold on to interest

rates at a ‘real’ level to encourage household savings.

Most importantly, we need a majority government with a clear mandate for development. For now,

India will have hold on till the next elections.


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11.0 Bibliography

• http://www.realityviews.in/2010/10/in-short-history-about-

indian-rupee-and.html

• http://www.economicshelp.org/blog/10251/currency/devaluation-

indian-rupee/

• http://www.indianhiddengems.com/2015/08/the-history-of-

indian-rupee-devaluation.html

• https://www.quora.com/What-are-the-reasons-for-Indian-Rupees-

devaluation-since-the-time-of-independence-in-1947

•

https://www.linkedin.com/pulse/journey-indian-rupee-since-

1947-forecast-2015-dollar-vs-mani

• International Monetary Fund (Book)

History of Devaluation by India

Documents