1 INTRODUCTION History of Rupee India was one of the first issuers of coins (circa: 6th Century BC), and as a result it has seen a wide range of monetary units throughout its history. There is some historical evidence to show that the first coins may have been introduced somewhere between 2500 and 1750 BC. However, the first documented coins date from between the 7th/6th century BC to the 1st century AD. These coins are called 'Punch- marked ' coins because of their manufacturing technique. Over the next few centuries, as traditions developed and empires rose and fell, the country's coinage designs reflected its progression and often depicted dynasties, socio-political events, deities, and nature. This included dynastic coins, representing Greek Gods of the Indo-Greek period followed by the Western Kshatrapa copper coins from between the 1st and the 4th Century AD. In 712 AD, the Arabs conquered the Indian province of Sindh and brought their influence and coverage with them. By the 12th Century, Turkish Sultans of Delhi replaced the longstanding Arab designs and replaced them with Islamic calligraphy. This currency was referred to as ' Tanka ' and the lower valued coins, ' Jittals '. The Delhi Sultanate attempted to standardise this monetary system and coins were subsequently made in gold, silver and copper.
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1
INTRODUCTION
History of Rupee
India was one of the first issuers of coins (circa: 6th Century BC), and as a result it has
seen a wide range of monetary units throughout its history. There is some historical evidence
to show that the first coins may have been introduced somewhere between 2500 and 1750
BC. However, the first documented coins date from between the 7th/6th century BC to the 1st
century AD. These coins are called 'Punch-marked' coins because of their manufacturing
technique.
Over the next few centuries, as traditions developed and empires rose and fell, the
country's coinage designs reflected its progression and often depicted dynasties, socio-
political events, deities, and nature. This included dynastic coins, representing Greek Gods of
the Indo-Greek period followed by the Western Kshatrapa copper coins from between the 1st
and the 4th Century AD.
In 712 AD, the Arabs conquered the Indian province of Sindh and brought their influence
and coverage with them. By the 12th Century, Turkish Sultans of Delhi replaced the
longstanding Arab designs and replaced them with Islamic calligraphy. This currency was
referred to as 'Tanka' and the lower valued coins, 'Jittals'. The Delhi Sultanate attempted to
standardise this monetary system and coins were subsequently made in gold, silver and
copper.
In 1526, the Mughal period commenced, bringing forth a unified and consolidated monetary
system for the entire Empire.
The first "Rupee" is believed to have been introduced by Sher Shah Suri (1486–1545),
based on a ratio of 40 copper pieces (paisa) per rupee. Among the earliest issues of paper
rupees were those by the Bank of Hindustan (1770–1832), the General Bank of Bengal and
Bihar (1773–75, established by Warren Hastings) and the Bengal Bank (1784–91), amongst
others. Until 1815, the Madras Presidency also issued a currency based on the Panam, with
The One Rupee Banknote, now not in use. The two-rupee banknote
French Indian 1 rupee (1938) One rupee —Obverse
The rupee on the East African coast and South Arabia
In East Africa, Arabia, and Mesopotamia the Rupee and its subsidiary coinage was current at various times. The usage of the Rupee in East Africa extended from Somalia in the north, to as far south as Natal. In Mozambique the British India rupees were overstamped, and in Kenya the British East Africa Company minted the rupee and its fractions as well as pice. The rise in the price of silver immediately after the First World War caused the rupee to rise in value to two shillings sterling. In 1920 in British East Africa, the opportunity was then taken to introduce a new florin coin, hence bringing the currency into line with sterling. Shortly after that, the Florin was split into two East African shillings. This assimilation to sterling did not however happen in British India itself. In Somalia the Italian colonial authority minted 'rupia' to exactly the same standard, and called the pice 'besa'.
The rupee in the Straits Settlements
The Straits Settlements were originally an outlier of the British East India Company. The Spanish dollar had already taken hold in the Straits Settlements by the time the British arrived in the nineteenth century, however, the East India Company tried to introduce the rupee in its place. These attempts were resisted by the locals, and by 1867 when the British
government took over direct control of the Straits Settlements from the East India Company, attempts to introduce the rupee were finally abandoned.
International use
With Partition, the Pakistani rupee came into existence, initially using Indian coins and Indian currency notes simply overstamped with "Pakistan". In previous times, the Indian rupee was an official currency of other countries, including Aden, Oman, Kuwait, Bahrain, Qatar, the Trucial States, Kenya, Tanganyika, Uganda, the Seychelles, and Mauritius.
The Indian government introduced the Gulf rupee, also known as the Persian Gulf rupee (XPGR), as a replacement for the Indian rupee for circulation exclusively outside the country with the Reserve Bank of India [Amendment] Act, 1 May 1959. This creation of a separate currency was an attempt to reduce the strain put on India's foreign reserves by gold smuggling. After India devalued the rupee on 6 June 1966, those countries still using it – Oman, Qatar, and the Trucial States (which became the United Arab Emirates in 1971) – replaced the Gulf rupee with their own currencies. Kuwait and Bahrain had already done so in 1961 and 1965 respectively.The Bhutanese ngultrum is pegged at par with the Indian rupee, and both currencies are accepted in Bhutan. The Indian rupee is also accepted in towns in Nepal which lie near the border with India. However, Indian Rupee denominations of 500 and 1000 are banned in Nepal.Rupee is the currency of Sri Lanka also.
*Watermark — White side panel of notes has Mahatma Gandhi watermark.
*Security thread — All notes have a silver security band with inscriptions visible when held against light.
*Latent image — Higher denominational notes display note's denominational value in numerals when held horizontally at eye level.
*Microlettering — Numeral denominational value is visible under magnifying glass between security thread and watermark.
*Fluorescence — Number panels glow under ultra-violet light.
*Optically variable ink — Notes of Rs. 500 and Rs. 1000 have their numerals printed in optically variable ink. Number appears green when note is held flat but changes to blue when viewed at angle.
*Back-to-back registration — Floral design printed on front and back of note coincides when viewed against light.
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Devaluations
What Is Devaluation Of Money?
Devaluation means officially lowering the value of currency in terms of foreign currencies .
There is a difference between devaluation and exchange depreciation. Devaluation is the
result of official government action. Depreciation or decline in the rate of exchange of one
currency in terms of another is due to market forces. Substantially devaluation and
depreciation both refer to the reduction of international currency in terms of foreign
currencies. When the rupee was delinked from the dollar and floated against a basket of
currencies on Jan 8, 1982, the rupee parity stood rupees 9.90 to a dollar. The State Bank of
Pakistan since then has devalued the rupee a number of times. The rupee spot buying rate to
dollar as on 1.6.2000 stands at rupees 54.
There could be many motives of the devaluation. It stimulates exports of commodities. It
restricts import demand for goods and services. It helps in creating a favourable balance of
payments. Almost all the countries of the world have devalued their currencies at one time or
the other with a view to achieving certain economic objectives. During the great depression
of 1930 devaluation was carried by most countries of the world for the objecting of correcting
over-valuation of currencies.
The fall of the Rupee
Price of silver – Rate of exchange: 1871–72 to 1892–93
After its victory in the Franco-Prussian War (1870–71), Germany extracted a huge indemnity from France of £200,000,000, and then moved to join Britain on a gold standard for currency. France, the U.S. and other industrializing countries followed Germany in adopting a gold standard throughout the 1870s. At the same time, other countries, such as Japan, which did not have the necessary access to gold or those, such as India, which were subject to imperial policies that determined that they did not move to a gold standard, remained mostly on a silver standard. A huge divide between silver-based and gold-based economies resulted. The worst affected were economies with silver standard that traded mainly with economies with gold standard. With discovery of more and more silver reserves, those currencies based on gold continued to rise in value and those based on silver were declining due to demonetization of silver. For India which carried out most of its trade with gold based countries, especially Britain, the impact of this shift was profound. As the price of silver continued to fall, so too did the exchange value of the rupee, when measured against pound sterling.
Since its Independence in 1947, India has faced two major financial crises and two consequent devaluations of the rupee: In 1966 and 1991.
1966 Economic crisis
Since 1950, India ran continued trade deficits that increased in magnitude in the 1960s. Furthermore, the Government of India had a budget deficit problem and could not borrow money from abroad or from the private corporate sector, due to that sector’s negative savings rate. As a result, the government issued bonds to the RBI, which increased the money supply, leading to inflation. In 1966, foreign aid, which was hitherto a key factor in preventing devaluation of the rupee was finally cut off and India was told it had to liberalize its restrictions on trade before foreign aid would again materialize. The response was the politically unpopular step of devaluation accompanied by liberalization. Furthermore, The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India, which further necessitated devaluation. Defence spending in 1965/1966 was 24.06% of total expenditure, the highest it has been in the period from 1965 to 1989 (Foundations, pp 195). The second factor is the drought of 1965/1966. The sharp rise in prices in this period, which led to devaluation, was often blamed on the drought by government.
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At the end of 1969, the Indian Rupee was trading at around 13 British Pence. A decade later, by 1979, it was trading at around 6 British Pence. Finally by the end of 1989, the Indian Rupee had plunged to an all-time low of 3 British Pence. This triggered the onset of a wave of irreversible liberalization reforms away from populist measures.
1991 Economic crisis
1991 is often cited as the year of economic reform in India. Surely, the government’s
economic
policies changed drastically in that year, but the 1991 liberalization was an extension of
earlier, albeit slower, reform efforts that had begun in the 1970s when India relaxed
restrictions on imported capital goods as part of its industrialization plan. Then the Import-
Export Policy of 1985-1988 replaced import quotas with tariffs. This represented a major
overhaul of Indian trade policy as previously, India’s trade barriers mostly took the form of
quantitative restrictions. After 1991, the Government of India further reduced trade barriers
by lowering tariffs on imports. In the post-liberalization era, quantitative restrictions have not
been significant.
While the devaluation of 1991 was economically necessary to avert a financial crisis, the
radical changes in India’s economic policies were, to some extent, undertaken voluntarily by
the government of P V Narasimha Rao. As in 1966, there was foreign pressure on India to
reform its economy, but in 1991, the government committed itself to liberalization and
followed through on that commitment. 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.
IMPACT OF DEVALUATION OF RUPEE ON IMPORT AND EXPORT
While depreciation is considered to help exports and make imports costlier, imports and
exports are affected by a number of factors like growth in world trade, growth in demand for
our exports, domestic need for imports, government policies etc. However, depreciation has
to be viewed in relation to issues like depreciation by competitors, extent of overvaluation of
domestic currency, impact on international debt and foreign investment, extent of domestic
inflation etc. In India, exports have performed well during 2000-01 with a growth of 19.83%
as against an export target of 18%. Export promotion being a constant endeavor of the
government, a number of steps have been taken to enhance the export growth which include
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reduction in transaction cost through decentralization, simplification of procedures and
various other measures as enumerated in the Exim Policy. Steps have also been taken to
promote exports through multilateral and bilateral initiatives, identification of thrust sectors
and focus regions. Special Economic Zones are being set up to further boost the exports.
Why Indira Gandhi devalued Indian Rupees by 40% in accordance to US Dollars at the
time of emergency in 1975?
Since 1950, India ran continued trade deficits that increased in magnitude in the 1960s.
Furthermore, the Government of India had a budget deficit problem and could not borrow
money from abroad or from the private corporate sector, due to that sector’s negative savings
rate. As a result, the government issued bonds to the RBI, which increased the money supply,
leading to inflation. In 1966, foreign aid, which was hitherto a key factor in preventing
devaluation of the rupee was finally cut off and India was told it had to liberalize its
restrictions on trade before foreign aid would again materialize.
The response was the politically unpopular step of devaluation accompanied by liberalization.
Furthermore, The Indo-Pakistani War of 1965 led the US and other countries friendly
towards Pakistan to withdraw foreign aid to India, which further necessitated devaluation.
Defence spending in 1965/1966 was 24.06% of total expenditure, the highest it has been in
the period from 1965 to 1989 (Foundations, pp 195). The second factor is the drought of
1965/1966. The sharp rise in prices in this period, which led to devaluation, was often blamed
on the drought by government.
At the end of 1969, the Indian Rupee was trading at around 13 British Pence. A decade later,
by 1979, it was trading at around 6 British Pence. Finally by the end of 1989, the Indian
Rupee had plunged to an all-time low of 3 British Pence. This triggered the onset of a wave
of irreversible liberalization reforms away from populist measures
Revaluation
In the period 2000–2007, the Rupee stopped declining and stabilized ranging between 1 USD = INR 44–48. In recent times, the Indian Rupee had begun to gain value and by 2007 traded around 39 Rs to 1 US dollar , on sustained foreign investment flows into the country. This posed problems for major exporters and BPO firms located in the country. The trend has reversed lately with the 2008 world financial crisis. The changes in the relative value of the
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rupee has reflected that of most currencies, e.g. the British Pound, which had gained value against the dollar and then has lost value again with the recession of 2008.
Valuation history
What Went Wrong ?
Clearly, there are many similarities between the devaluation of 1966 and 1991. Both
were preceded by large fiscal and current account deficits and by dwindling international
confidence in India’s economy. Inflation caused by expansionary monetary and fiscal policy
depressed exports and led to consistent trade deficits. In each case, there was a large adverse
shock to the economy that precipitated, but did not directly cause, the financial crisis.
Additionally, from Independence until State, Market & Economy
Centre for Civil Society 89 1991, the policy of the Indian government was to follow the
Soviet model of foreign trade by viewing exports as a necessary evil whose sole purpose was
to earn foreign currency with which to purchase goods from abroad that could not be
produced at home.
As a result, there were inadequate incentives to export and the Indian economy missed
out on the gains from comparative advantage. 1991 represented a fundamental paradigm shift
in Indian economic policy and the government moved toward a freer trade stance.