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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Indian Rupee's journey since Independence: Down by 65 times against dollar

Indian Rupee's journey since Independence: Down by 65 times against dollar

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VALUEPICK

VALUEPICK
Expert
Expert
http://articles.economictimes.indiatimes.com/2013-08-24/news/41444029_1_indian-rupee-american-currency-continued-dollar-demand

Aug 24, 2013, 01.54PM IST

SMC Capital

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.

JOURNEY SINCE INDEPENDENCE

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 got freedom 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 devaluation of 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 with China 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 the US dollar.

In 1975, value of the Indian rupee was pegged at 8.39 against a dollar.

In 1985, it was further devalued to 12 against a dollar.

In 1991, India faced a serious balance of payment crisis and was forced to sharply devalue its currency. The country was in the grip of high inflation, low growth and the foreign reserves were not even worth to meet three weeks of imports. Under these situations, the currency was devalued 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 range of 40-50 between 2000 and 2010.

It was mostly at around 45 against a dollar. It touched a high of 39 in 2007.

The Indian currency has gradually depreciated since the global 2008 economic crisis.

Liberalising the currency regime led to a sharp jump in foreign investment inflows and boosted the economic growth

PRESENT SCENARIO

In the week gone by, the Indian rupee extended falls to a new low of 65.50 to the dollar as heavy demand from importers along with weak domestic equities continued to weigh on sentiment.

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 P Chidambaram said, adding that there is no plan to introduce capital controls.

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