By Shivani Baghel

Edited by Madhavi Roy, Senior Editor, The Indian Economist

Once upon a time, one dollar was equal to one rupee (almost). And then, it never happened again.

Surfing through international portals, I’d always sit with a calculator on my side. Conversion is not a cake walk. Astonished and disappointed, returning back to inland cheaper websites, is definitely not amusing.
So, this was the inspiration behind tracing The Story of the falling Rupee.

Back in 1947, the Indian rupee was almost at par with the American dollar. There were no borrowings on India’s balance sheet.  Post WWII, USA was standing as the largest exporter in the world and so its value was proving to be critical in the world economy. At that time, India’s currency was tied to UK’s sterling where UK’s sterling, along with other currencies, was pegged at gold.  The gold itself was in dollars. As for India, it made its exchange rate regime a fixed one, with an aim of keeping inflation low. 1$=Rs.4.79, the rupee was pegged at 4.79 during 1948-1961. With high industrial, agricultural and economic growth, India was successful in keeping away the financial crisis for some time. However, slowly, a deficit started building up. With its 1st Five Year Plan in 1951, the government borrowed external funds to finance its welfare and development.

Within five years of independence, India was at war with its neighbors. The 1962 China War along with 1965 the Indo-Pakistan War drained out India’s wealth and resulted in huge deficits. The US had withdrawn its foreign aid due to India’s war with Pakistan. This, along with low industrial and agricultural output pushed down India’s rupee value. The few public sector companies on the ground also started showing negative growth. Moreover, droughts in massive parts of the country inflated the Indian economy and its prices, thereby aggravating the devaluation of the rupee.  With nowhere to go and no more dollars, the Indian government announced a 57% depreciation of the rupee overnight from Rs.4.75/$ to Rs.7.5/$.

Till 1980, the value of rupee remained stable. However, the 1979 Energy Crisis and the 1980’s inflated gold prices held India in its clutches. Crude oil and gold have always been India’s primary imports. By 1991, we had reached Rs.17/$.  This was the year of the 1991 Economic Crisis. The government was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks of imports.India had always been an importer, exports were never encouraged.As a result, India had no choice but to push down its rupee to ensure foreign currency and goods thrived in the Indian markets.

By 1993, India was converted into a floated exchange rate regime. The exchange rate was determined by market forces with little intervention by the central bank. This year, the rupee was valued at 31.37 against a dollar. However, this year also saw significant changes in the trade pattern. Because of the devaluation, imports had become expensive and due to the 1991 liberalization, exports galloped. The rupee traded in the range of 40-50 during 2000-2010. This range is said to be a stabilized, ideal range for Indian exports and imports. 2007 saw the rupee at its highest at Rs.39/$, on account of sustained foreign investment flow into the country. Sweet bells too many, an appreciation of that sort posed a major hurdle for IT and BPO firms who had now started incurring losses.

However, the 2008 world financial crisis reversed the trend. It made foreign investors transfer huge sums back into their own countries, resulting in high inflation, interest rates and increased external borrowings for India.  With no lead in sight, lack of foreign investments and increasing fiscal deficits, India’s economy was de-stabilizing by the end of 2012. By 2013, the rupee dropped to Rs.68.80 per dollar! After 66 years, the dollar remains young and radiant whereas the rupee grows old and sluggish.

The diminution occurred due to twin reasons- a) withdrawal from FIIs, raising US dollar’s demand, strengthening it further; b) Fed’s Ben Bernanke’s announcement of Quantitative Easing yielding good dividends in the US, attracting investors back home.  Along with these, India was stepping up the current account deficit, the high fiscal deficit. And its unstable political environment attributed to a major downfall of the rupee.

Income levels influence currencies through consumer spending. When incomes increase, people spend more. Higher demand for imported goods increases demand for foreign currencies and, thus, weakens the local currency. Probably, this is what has happened. With an amazing change in India’s lifestyle, the spending behavior of the Indians have evolved. There has been an ever increasing surge in demand for imported luxury items. This has pulled down the local currency. The local industry is not getting its share of what its due. Apart from social setbacks, this is proving to be economically fatal. There has to be a time when the rupee at least stabilizes, if not become equal to the American dollar.  Narendra Modi’s creation ‘MAKE IN INDIA’ is making waves globally. He is candidly inviting investors all over the world to manufacture here. -” It is important for the purchasing power of the common man to increase, as this would further boost demand, and hence spur development, in addition to benefiting investors. The faster people are pulled out of poverty and brought into the middle class, the more opportunity will there be for global business. Therefore, investors from abroad need to create jobs. Cost effective manufacturing and a handsome buyer – one who has purchasing power – are both required. More employment means more purchasing power.” In fact, in all his recent assemblies, he has been urging the public to shift towards ‘Made in India’ products and support the economy in their own ways. Encouraging the public mode of transportation, he is seeking to reduce India’s dependency on crude oil. According to the RBI, petroleum, crude and other oil products accounted for more than 35 per cent of the country’s total imports in 2011-12.

Another cause of concern in India is the heavy investment in Gold. Indian women love their golden gleaming jewels and their better halves always see this splurge as an investment. India is not a very advanced or developed nation, yet it is a country where the modes of real- estate investment and financial market investment are easily accessible and affordable. This makes gold investment the most sought after. India imports a major chunk of its gold from USA to fulfill its enormous demand. This leads to a higher current account deficit and an increasing demand for the US dollar, thus depreciating the rupee. Moreover, the investments made in gold are of little use to the national banking system. They cannot be used for further investments as they are simply stashed into the bank lockers rather than becoming a foundation for a potential development project. This was the reason behind P.Chidambran’s initiative of a 10% hike in import duties for gold.

Today, the rupee hovers around 61 per dollar. A favorable political environment, powered by one of the best leaders in the history of India, coupled with a remarkable monetary policy by a year old governor of RBI- Dr. Raghuraman Rajan, India’s economy is all set to the path of recovery and prosperity. Bridging gaps with the international economies and tying close relationships with all the major hubs of the world, Modi has already created a very positive outlook for the investors all around. With that kind of an invigorating atmosphere, India’s future looks quite promising and propitious today. However, economics walk on the periphery of uncertainty. In that regard, the promising fortune of the Indian rupee can turn the tables down, any day.


Shivani Baghel is a true Piscean at heart and likes calling herself a Dreamer! Although an introvert, she is an absolute fun loving girl once you get to know her. She loves being an Agony Aunt as she says, “nothing gives me more happiness than helping others”. Her loved ones describe her as trustworthy and honest. She prefers spending her weekends lazing around in a corner, hooked up to a novel, sipping some green tea besides her window. A foodie that she is, exploring and discovering new places around her world fascinates her. She dreams of travelling the world around and writing something unique of each place. She loves doodling random thoughts at random places. Although she calls herself a big procrastinator, she knows for a fact, that no one can nail it the way she does at the last moment. Shivani firmly believes that wearing rose colored glasses can bring you happiness for today and aspirations for tomorrow, and hence doesn’t care a bit when people ask her to get a reality check! After all, only those who have the courage to dream it can achieve it. 

Posted by The Indian Economist | For the Curious Mind