7/29/2019 History of Exchange Rates in India

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HISTORY OF EXCHANGE RATES IN INDIA

ndia was a founder member of theInternational Monetary Fund (IMF). It followed the fixed parity system

till the early 1970s as a result which thevalue of the rupee in terms of goldwas originally fixed as the

equivalent of 0.268601 gram of fine gold. In view of Indias long economic and political relations with

England and membership of the sterling area from September 1939 to June 1972, the rupee was pegged

to the pound sterling. Theexchange ratewas thus remained unchanged but the gold content of the rupee

fell to 0.186621 gram. Again, with the devaluation of the Indian rupee in June 1996 the gold content fell

further to 0.118489 gram. The following year, the pound was also devalued. This devaluation did have an

impact on the rupee pound link, but the rupee was kept stable in terms of the pound. The latter continued

as an intervention currency.

In August 1971 when the system of fixed parity was under a cloud, the rupee was briefly pegged to the

US dollar at Rs. 7.50/US $ and this continued till December 1971. The peg to the dollar was not very

effective as the pound sterling remained to continue as the intervention currency. In December 1971, the

rupee returned to the sterling peg at a parity of Rs. 18.9677/ with of course , a margin of 2.2 percent.

After the Smithsonian arrangement had failed and the pound had began to float, the rupee tended to

depreciate.The Reserve Bank of India then had to delink it from the pound sterling in September 1975

and link it with a basket of five currencies; but the pound sterling was retained as the intervention

currency for fixing the external value of the rupee. The weight of different currencies forming the basket

remained confidential and the exchange rate continued to be administered. The administered rate did

not keep pace with thegrowing rate of inflationand this resulted in a widening gap between the real and

the nominal exchange rates that was more evident during the late 1980s and early 1990s. Thus,

wheneconomic reforms were initiated in the country, the rupee was depreciated by around 20 percent in

two successive installments in the first weeks of July 1991. In absolute terms, depreciation occurred from

Rs. 21.201/US $ to Rs. 25.80 /US $

From March 1992 a dual exchange rate system was introduced, in terms of which 40 percent of export

earnings were to be converted at the official exchange rate prescribed by the Reserve Bank of Indiaand

the remaining 60 percent were to be converted at market determined rates. The US dollar was the

intervention currency. From March 1993 the receipts on merchandise trade account and some of the

items of invisible trade account came to be convertible entirely at the market determined rates on all items

of current account.

The adoption of the unified exchange rate system form March 1993 means adoption of a floating-rate

regime, but it is a managed floating and the reserve Bank of India intervenes in the foreign exchange

market in order to influence the value of the rupee. In the first two years, the value of the rupee remained

stable but the onward, it has been depreciating despiteRBIs intervention.

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