Path of the Indian Rupee 1947-1993

Prefatory Note: This was part of a 1993 study I did as a Consultant at the International Monetary Fund in Washington in a project on exchange-rates and exports of “South Asian” countries for Hubert Neiss.   The IMF is not responsible for its content.  It was included in “India in World Trade & Payments”, first published in The Statesman, Feb 11-12 2007. http://www.thestatesman.net.   See also

1)  Monetary Integrity and the Rupee

2) My article “India’s Money” in *Cayman Financial Review*

3) My 3 Dec IIC Delhi talk “Towards Making the Indian Rupee a Hard Currency of the World Economy: An analysis from British times until the present day” & its coverage in Asian Age/Deccan Herald, GDI Impuls Zurich, Lok Sabha TV & Sunday Guardian

4) Did Jagdish Bhagwati “originate”, “pioneer”, “intellectually father” India’s 1991 economic reform?  Did Manmohan Singh? Or did I, through my encounter with Rajiv Gandhi, just as Siddhartha Shankar Ray told Manmohan & his aides in Sep 1993 in Washington?  Judge the evidence for yourself.  And why has Amartya Sen misdescribed his work? India’s right path forward today remains what I said in my 3 Dec 2012 Delhi lecture!

5) No magic wand, Professor Rajan? Oh but there is…

Path of the Indian Rupee 1947-1993

by Subroto Roy

Washington June 1993

“Following the initial devaluation with sterling in 1949, the Indian rupee was pegged to sterling and maintained at the same par-value for the next 16 years.  This was in spite of weakening reserve positions and numerous severe shocks to the economy including a 1963 war with China and a 1965 war with Pakistan, as well as severe droughts and food crises.

Devaluation on June 6 1966 by 57.5 percent to Rs. 7.50 per United States dollar met with enormous resistance on non-economic grounds, and indirectly contributed to the Congress Party’s losses in the elections of 1967.  This experience may have contributed to a distinct reluctance to even consider using the exchange-rate for economic policy, or to even attempt to find a realistic price for the rupee.

India did not respond to sterling’s devaluation in November 1967, leading to a bilateral appreciation.  While the Indian economy continued to suffer egregious shocks throughout the late 1960s and 1970s — including food crises, the rise in petroleum prices, refugees from the Pakistan civil war and the 1971 war creating Bangladesh, as well as domestic turmoil of various kinds such as the Railway Strike and the political Emergency and later political instability — the rupee was not adjusted downwards.   The closing of the “gold window” and breakdown of the Bretton Woods system in August 1971 led India to maintain the same bilateral exchange-rate with the United States dollar, thereby devaluing with the dollar’s depreciation and delinking from sterling, though sterling remained the intervention currency.  After the Smithsonian Agreement in December 1971, the rupee was again linked to sterling at Rs. 18.97, which implicitly meant a 5.4 percent devaluation against sterling.  When sterling floated in June 1972 the rupee’s peg was maintained, thus effectively devaluing the rupee along with sterling’s depreciation.  Three small devaluations occurred against sterling by a total of 2 percent between June 1972 and July 1975.

In September 1975, India delinked from sterling and pegged — within 2.25 percent until January 30 1980 and then within 5 percent margins — to an undisclosed basket of hard currencies which included the United States dollar, Japanese yen and Deutschmark.

Between 1981 and 1991, the Indian rupee was actively managed downwards by the authorities, remarkably with no political resistance unlike the 1966 episode in a world of fixed rates.  Discrete downward changes occurred by 6.4 percent at the end of 1981, 4.3 percent at the end of 1982, and 4.5 percent at the end of 1983.  These changes in the first half of the 1980s are relatively small compared to the depreciation of other major currencies against the United States dollar in that period.  From September 1985 to July 1991, the rupee followed a more rapid downward course, depreciating by some 40 percent in nominal terms, during which time the United States dollar also depreciated against the other major currencies.  What this may suggest is that the dollar weighed relatively heavily in the basket with which the rupee seemed to be pegged.

In July 1991, the incoming government was able to initiate significant economic reforms with surprising ease, especially the abolishment of  import quotas and removal of export subsidies.  On July 1 1991, the rupee was devalued by 9 percent and then on July 3 by a further 11 percent in the context of a determined effort to change the course of Indian economic policy-making towards one required by an outward-orientation.

The first budget of the Narasimha Rao Government on March 1 1992 partially floated the rupee in a context of removal of import licensing and export subsidies, and a general domestic and external liberalization.  Between March 1 1992 and the budget of March 1 1993, the rupee was on a dual rate which implicitly taxed exporters who had to surrender 40 percent of their foreign exchange earnings at an officially determined rate and could sell 60 percent in an open market.  On March 1 1993, the Indian rupee was begun to be made convertible for purposes of current account transactions. With these changes, a breakthrough in thinking may have been achieved, insofar as Indian economic policy-making may have been partially freed of the belief, held since the 1940s, that the exchange-rate of the rupee must necessarily be seen as an administered price and not a market-determined price.”

30 August 2013:  Here is a graph showing interest in this article at my blog… Some young economist might correlate that with the currency’s recent volatility…

pathoftheIndianrupee

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6 Responses to “Path of the Indian Rupee 1947-1993”

  1. Anonymous Says:

    You say here “This was in spite of weakening reserve positions and numerous severe shocks to the economy including a 1963 war with China and a 1965 war with Pakistan, as well as severe droughts and food crises.” But the war with China was in 1962!

  2. drsubrotoroy Says:

    Indeed I did. This was written in 1993 and I do not recall now if I made a mistake or meant to suggest that the war which started in late 1962 had its economic impact in 1963. In any case, the anonymous commentator is referred to my several recent articles on the 1962 war reproduced here.

  3. ecocurious Says:

    I find that most sources mention India devalued the rupee 18-19% in July whereas Dr Roy has been very precise: 9% on 1 July and 11% on 3 July.

  4. drsubrotoroy Says:

    Readers are reminded they are welcome to quote from my work under the normal “fair use” rule, but please quote me by name and indicate the place of original publication in case of work that is being republished here. In case of this study, it should be referred to as “Path of the Indian Rupee 1947-1993″ by Dr Subroto Roy, first published at http://www.independentindian.com 2008, part of his study “Exchange-rates and manufactured exports of South Asia”, IMF Washington DC mimeo, 1993.

  5. Kamlesh Doctor Says:

    Dr Roy, If the devaluation on June 6 1966 by 57.5 percent to Rs. 7.50 per United States dollar, was the rate of dollar before devaluation under Rs.5? Kamlesh Doctor, Ahmedabad.

  6. drsubrotoroy Says:

    Clearly yes. (There had been a 1949 devaluation too along with sterling incidentally.)


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