Thursday, 16 June 2011

Evaluation of India's Rupees from 1950's to 2011

Evaluation of India's Rupees from 1950's to 2011


Through out the history of Independent India, Curren Since 1950's , India ran continued trade deficits that increased in magnitude in the 1960s. Furthermore, the Government of India had a budget deficit problem and could not borrow money from abroad or from the private corporate sector, due to that sector’s negative savings rate. As a result, the government issued bonds to the RBI, which increased the money supply, leading to inflation. In 1966, foreign aid, which was hitherto a key factor in preventing devaluation of the rupee was finally cut off and India was told it had to liberalise its restrictions on trade before foreign aid would again materialise.

The response was the politically unpopular step of devaluation accompanied by liberalisation. Furthermore, The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India, which further necessitated devaluation. Defence spending in 1965/1966 was 24.06% of total expenditure, the highest it has been in the period from 1965 to 1989 . The second factor is the drought of 1965/1966. The sharp rise in prices in this period, which led to devaluation, was often blamed on the drought by government.
At the end of 1969, the Indian Rupee was trading at around 13 British Pence. A decade later, by 1979, it was trading at around 6 British Pence. Finally by the end of 1989, the Indian Rupee had plunged to an all-time low of 3 British Pence. This triggered the onset of a wave of irreversible liberalisation reforms away from populist measures.

1991 Economic crisis


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. India started having balance of payments problems since 1985, and by the end of 1990, it found itself in serious economic trouble. The government was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks’ worth of imports. As in 1966, India faced high inflation and large government budget deficits. This led the government to devalue the rupee.At the end of 1999, the Indian Rupee was devalued considerably.

Revaluation

Value of Indian rupee as per dollar & pound


In the period 2000–2007, the Rupee stopped declining and stabilized ranging between 1 USD = INR 44–48. In recent times, the Indian Rupee had begun to gain value and by 2007 traded around 39 Rs to 1 US dollar , on sustained foreign investment flows into the country. This posed problems for major exporters and BPO firms located in the country. The trend has reversed lately with the 2008 world financial crisis. The changes in the relative value of the rupee has reflected that of most currencies, e.g. the British Pound, which had gained value against the dollar and then has lost value again with the recession of 2008.

1 comment:

  1. I actually enjoyed reading through this posting.Many thanks.

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