75th Independence Day: From Rs 4 per dollar to Rs 80, the course of the Indian rupee over the past 75 years

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India is set to celebrate 75 years of independence on August 15, 2022. Since the country broke free from the clutches of the British Raj, India’s currency – the rupee – has depreciated. Once 13 rupees was enough to buy a pound sterling, or 4 US dollars, the Indian currency has depreciated until today at almost 80 rupees for 1 US dollar. The rupiah’s weakness over the past 75 years has been due to many factors, with the trade deficit reaching record highs of $31 billion from almost no deficit at the start of the year. independence, mainly due to the high oil import bill. Since independence, the rupee has depreciated almost 20 times.

How Rupee has played over the past 75 years

The 1966 devaluation

Until 1966, India’s currency was pegged to the British pound, meaning that before the US dollar became the standard world currency, the rupee was measured in pounds rather than US dollars. According to an article published by Devika Johri & Mark Miller for the Center for Civil Society, the British currency was devalued in 1949 and India maintained parity with the pound. The rupee was first devalued in 1966 and pegged to the US currency. According to records, the mid-1960s was a time of severe economic and political strain for India. By 1965-66, the monsoon had failed, food grain production had declined, and industrial production was also declining. The money supply was growing at unprecedented rates. Inflation has driven Indian prices much higher than world prices, experts say.

India’s wars with China and Pakistan, as well as the shock of a major drought during this period, increased deficit spending, further accelerating already severe inflation. In 1966, foreign aid was finally cut off and India was ordered to liberalize its trade restrictions before foreign aid materialized again. All these weak macroeconomic indicators led to the first devaluation of the rupee. On June 6, 1966, the Indira Gandhi government devalued the Indian rupee from Rs 4.76 to Rs 7.50 per dollar in one fell swoop.

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The 1991 devaluation

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. In late 1990, the then government of India found itself in severe economic difficulties as it faced balance of payments crisis due to huge macroeconomic imbalance. The country was unable to pay for essential imports or service its external debt. The government was close to defaulting and its foreign exchange reserves had nearly dried up. Similar to 1966, the country was also facing high inflation, large government budget deficits and a poor balance of payments position.

Among other measures taken to combat the crisis, the government, together with the Reserve Bank of India, undertook a two-step devaluation of the rupee. On July 1, 1991, the currency was first devalued against major currencies by around 9%, followed by another devaluation of 11% two days later. On July 1, the dollar spot sell rate was raised to Rs 23.04 from Rs 21.14 on June 30. Two days later, on July 3, the RBI announced a second devaluation, which took the dollar to Rs 25.95. In three days, the rupee had been devalued by more than 18.5% against the dollar and 17.4% against the pound sterling.

Continuous damping

Since 1991, the rupee has depreciated at the rate of 3.74% on CAGR (compound annual growth rate) against the US dollar due to inflation and the interest rate differential between the US and India, said Dilip Parmar, research analyst at HDFC Securities. However, between 2000 and 2007, the currency stabilized between $1 = Rs 44 and Rs 48. At the end of 2007, it reached an all-time high of 39 to the dollar, due to sustained inflows of foreign investment in the country. However, the decline resumed with the onset of the 2008 global financial crisis as foreign investors transferred huge sums to their own countries.

Parmar added: “Looking further back, we see a major depreciation started from 2009, from 46.5 to now at 79.5, 4.3% CAGR from almost unchanged from 2000 to 2009, from 46.7 to 46.5”, Due to the stagnation of reforms, and the decline in foreign investment, the rupee experienced a sharp decline in early 2013. The currency lost 27% of its value between June and August 2013 .

Year USDINR IMF India CPI IMF US CPI India 10 year bond. Yield (%) US 10 Bond Yield (%) Bond yield Diff.
10-08-2022 79.46 204.7297 135.8879 6.455 2.7773 3.6777
31-12-2020 73.07 182.9888 118.6905 5.867 0.9132 4.9538
31-12-2010 44.705 100 100 7.915 3.2935 4.6215
31-12-2009 46.525 89.2942 98.3864 7.581 3.8368 3.7442
31-12-2000 46.675 54.3383 78.9707 10.902 5.112 5.79
31-12-1991 25.79 26.1321 62.4573 6.699
31-12-1990 18.12 22.949 59.9198 8.067
Source: Dilip Parmar, Research Analyst, HDFC Securities
1991 CAGR 2009 CAGR
USDINR 3.74% 4.34%
IMF India CPI 7.00% 6.80%
IMF US CPI 2.59% 2.59%
CPI Diff. 4.41% 4.21%
Source: Dilip Parmar, Research Analyst, HDFC Securities

Read also: The internationalization of the rupee, a step in the right direction by RBI; must consider long-term durable solutions

Why the rupee has depreciated since independence

“India used to be called a ‘third world country’ but since independence we have progressed in all aspects and are now among the largest economy in the world. The rupiah which was pegged at ~3.5 to the dollar in 1947 recently tested the 80 mark as the dollar strengthened strongly from its major crosses following the hawkish stance of the Federal Reserve and oil prices energy around the world have risen sharply since the emergence of COVID. The weakness of the rupiah during these years was due to many factors, with the trade deficit now reaching record highs of $31 billion, while there was almost no deficit at the start of independence. , mainly due to the high oil import bill,” said Gaurang Somaiya, Forex & Bullion. Analyst, Motilal Oswal Financial Services.

“The 1990 Gulf War and deteriorating external balance brought India to the brink of default and to the balance of payments front. While the budget deficit as a percentage of GDP increased between 1990-91 and 1991-92 and the growth of public expenditure fell sharply. The push for reforms boosted GDP growth considerably until 1997-98. Central government spending increased by more than 20% on an annual basis in 2007-08 and 2008-09,” he added.

On the domestic front, India’s GDP has risen sharply since the introduction of the reform process which started in 1991. The challenges facing the economy in the current scenario are very different from those at the time of the independence. It is not immune to global upheavals and yet is able to control inflation when global economies feel the heat. For the Indian economy, there are more positives than negatives and the economy is expected to grow at a faster pace in the coming years. “We expect the Rupee to continue to fall against the US Dollar, but the pace of depreciation may slow following the massive build-up of a war chest by the RBI as part of the Foreign Reserve Reform. said Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services.

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