The volatile journey of Indian rupee since independence

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Gyanendra Kumar Keshri | 16 Aug, 2013
The Indian rupee, which was at par with the American currency at the time of independence in 1947, hit a record low of 62.03 against the dollar recently. This means the Indian currency has depreciated by almost 62 times against the greenback in the past 66 years.

The currency has witnessed a large volatility in the past two years. This volatility became acute 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 the economic policy markers in the country. The central bank as well as the government has taken a series of measures to curb the volatility in the markets.

Despite those measures, the rupee continues to depreciate. And the trend is unlikely to reverse any time soon.

"We expect the rupee to depreciate further. It may touch 63 against a dollar in near-term (in a couple of months)," Reena Rohit, chief manager, non-agri commodities and currencies at Angel Broking, told agency.

She said rupee depreciation was badly hurting Indian economy. It was fuelling inflation and has hurt economic growth.

The Indian currency has witnessed a roller-coaster journey since independence. Many geopolitical and economic developments have affected its movement in the last 66 years. Here is a broader look at the Indian rupee's journey since 1947:

- India got freedom from British rule on Aug 15, 1947. At that time the Indian rupee was linked to the British pound and its value was at par with the American dollar. There was 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, Indian choose 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, the Indian rupee was linked to a basket of three currencies comprising the US dollar, the Japanese yen and the German mark. The value of the Indian rupee was pegged at 8.39 against a dollar.
- In 1985 it was further devalued to 12 against a dollar.

- India faced a serious balance of payment crisis in 1991 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 situation, the currency was devalued to 17.90 against a dollar.

- The year 1993 is very important in Indian currency history. It was in this year when the 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. In 1993, one was required to pay Rs.31.37 to get a dollar.

- The rupee traded in the range of 40-50 between 2000-2010. 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.

- Former finance minister Manmohan Singh, who is now the prime minister, was instrumental in liberalising the currency regime. The move led to a sharp jump in foreign investment inflows and boosted the economic growth.

"India being a developing economy with high inflation, depreciation of the currency is quite natural," said Siddharth Shankar, an economic expert and advisor at brokerage firm KASSA.

Shankar said the sharp depreciation as witnessed this year was hurting the economy.

"Depreciation of rupee is good, so long as it is not volatile. A random depreciation that we have seen in the last few months is bad and it has hurt the economy," he said.

The Indian currency hit a record low of 61.80 against a dollar Aug 6. It closed at 61.28 Wednesday.

(Gyanendra Kumar Keshri can be reached at gyanendra.k@ians.in)