India is all set to celebrate 75 years of Independence on 15 August 2022. Ever since the country broke free from the clutches of the British Raj, Indian currency – the rupee – has been depreciating. From once 13 rupees being enough to purchase a pound sterling, or 4 US dollars, the Indian currency has depreciated to now to almost Rs 80 to 1 US dollar. Weakness for the rupee in the last 75 years has been contributed by many factors with trade deficit rising to record highs of $31 billion from almost no deficit at the start of independence, mainly contributed by the high oil import bill. Since independence, the rupee has depreciated almost 20 times.
How Rupee has performed in the last 75 years
The 1966 devlauation
Until 1966, the Indian currency was pegged to the British pound, meaning that before the US dollar was taken as the standard global currency, the rupee used to be measured in terms of pounds rather than the US dollar. According to a paper published by Devika Johri & Mark Miller for the Centre for Civil Society, the British currency was devalued in 1949 and India maintained par with the pound. The rupee was first devalued in 1966 and was pegged to the American currency. According to records, the mid-sixties was a period of severe economic and political stress for India. During 1965-66, the monsoon had failed, food grains production declined and industrial production was also down. Money supply was increasing at unprecedented rates. Inflation had caused Indian prices to rise a lot higher than world prices, according to experts.
The wars India fought with China and Pakistan, along with the shock of a major drought during that time, increased deficit spending, further accelerating the already severe inflation. In 1966, foreign aid was finally cut off and India was told to liberalise its restrictions on trade before foreign aid would again materialise. All these weak macro-economic 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 to a dollar in one swoop.
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. At the end of 1990, the then Indian government found itself in serious economic trouble as it faced the Balance of Payment crisis due to huge macroeconomic imbalance. The country was not in a condition to pay for essential imports or service its external debt payments. The government was close to default and its foreign exchange reserves had nearly dried up. Similar to how it was in 1966, the country was also dealing with high inflation, large government budget deficits, and a poor balance of payments position.
Among other steps taken to combat the crisis, the government, along with the Reserve Bank of India, undertook a two-step devaluation of the rupee. On 1 July 1991, the currency was first devalued against major currencies by around 9 per cent, followed by another devaluation of 11 per cent two days later. On July 1, the spot selling rate for the Dollar 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. Within three days, the Rupee had been devalued by over 18.5% against the Dollar, and by 17.4% against the Pound Sterling.
Since 1991, the rupee has been depreciating at the pace of 3.74% on CAGR (Compound annual growth rate) with respect to the American dollar because of inflation and interest rate differential between US and India, said Dilip Parmar, Research Analyst, HDFC Securities. However, in the period between 2000 and 2007, the currency stabilised ranging between $1 = Rs 44– Rs 48. In late 2007, it reached a record high of 39 per dollar, on account of sustained foreign investment flows into the country. However, the decline resumed with the onset of the 2008 world financial crisis as Foreign investors transferred huge sums out to their own countries
Parmar added, “Further looking at the past, we see major depreciation started from 2009 onwards, from 46.5 to now at 79.5, 4.3% CAGR as compared to almost unchanged from 2000 to 2009, from 46.7 to 46.5,” Due to stagnant reforms, and declining foreign investment, rupee saw a steep decline in early 2013. The currency lost 27 per cent of its value between June and August 2013.
|Year||USDINR||IMF India CPI||IMF US CPI||India 10 Bond Yr. Yield (%)||US 10 bond Yr. Yield (%)||Bond Yield Diff.|
|CAGR from 1991||CAGR from 2009|
|IMF India CPI||7.00%||6.80%|
|IMF US CPI||2.59%||2.59%|
Why Rupee has depreciated since Independence
“India was once branded as a ‘third world country’, but since independence we have progressed in all aspects and are now amongst the world’s biggest economy. Rupee that was pegged at ~3.5 per dollar in 1947 just recently tested the 80 mark as the dollar strengthened sharply against its major crosses following hawkish stance by the Federal Reserve and as energy prices globally have risen sharply since the emergence of COVID. Weakness for the rupee in these years has been contributed by many factors with the trade deficit now rising to record highs of $31billion from almost no deficit at the start of independence mainly contributed by high oil import bill,” said Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services.
“The 1990 Gulf War and worsening external balance brought India to the brink of default and the balance of payment front. While the fiscal deficit as a share of GDP increased between 1990-91 and 1991-92 and growth of government spending came down sharply. The reforms push gave a massive boost to GDP growth until 1997-98. The central government’s spending rose by more than 20% on an annual basis in 2007-08 and 2008-09,” he added.
On the domestic front, India’s GDP has surged sharply since the introduction of reform process that began in 1991. Challenges faced by the economy in current scenario are very different from those at the time of independence. It is not immune to global upheaval and yet is able to keep inflation in control when global economies are feeling the heat from the same. For the Indian economy there are more positives than negatives and the economy is set to move ahead at a faster pace in the coming years. “We expect that rupee could continue to fall against the US dollar going ahead but the pace of depreciation could be getting slow following a massive war chest build by the RBI in the reform of FX reserves,” said Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services.