From 4 to 80: Looking back on the rupee’s journey since India’s independence
New Delhi:
India is celebrating 75 years of Independence and is at the crossroads of realizing sustainable economic growth for the people over the next 25 years – what the government calls “Amrit Kaal”.
Other aspects of the economy aside, let’s take a look at how the Indian rupee has compared to other global standard currencies since 1947. The value of a country’s currency. is an important indicator to evaluate its economic path.
A lot has happened on the macroeconomic front since 1947, including economic stress in the 1960s that led to a decline in food and industrial production.
Then came Indo-China and Indo-Pakistan, expanding spending and spawning a balance of payments crisis.
With a high import bill, India is close to defaulting on its foreign exchange reserves.
According to reports, the then government led by Indira Gandhi had to drastically devalue the rupee. The value of the rupee depreciated from Rs 4.76 against the US dollar to Rs 7.5.
Then, in 1991, India again fell into a serious economic crisis due to the country’s inability to pay its imports and meet its foreign debt obligations.
Once again, India is on the verge of default, demanding much-needed reforms to open up the country’s economy.
To negate the crisis, the Reserve Bank of India reported devaluation of the rupee in two strong periods – 9% and 11% respectively. After devaluation, the value of the rupee against the US dollar is about 26.
From Rs 4 during Independence against the benchmark pound then to around Rs 79 to Rs 80 against the US dollar, the rupee has depreciated by Rs 75 over the past 75 years.
Gaurang Somaiya, Forex and Bullion, said: “The weakening of the rupee in these years has been caused by many factors. Analyst, Motilal Oswal Financial Services.
Mr. Somaiya added: “We expect that the rupee can continue to fall against the US dollar, but the rate of depreciation may slow after the RBI builds up huge foreign exchange reserves during the reform. foreign exchange reserves.
While a falling rupee may not benefit the economy as a whole, a depreciating currency has its value when it helps boost exports.
Since the economic reforms of 1991, the rupee has depreciated at a rate of 3.74% on CAGR (compound annual growth rate) against the US dollar due to inflation and interest rate differentials between the US and India. Degree, said Dilip Parmar, Research Analyst. at HDFC Securities broker.
From 2000 to 2007, the rupee was stable to some extent, led by significant foreign investments pouring into the country but then fell during the 2008 global financial crisis.
“Looking deeper into the past, we see large depreciation starting from 2009 onward, from 46.5 to now at 79.5, a CAGR of 4.3% compared to virtually unchanged from 2000 to 2009, from 46.7 to 46.5,” added Mr. Parmar.
The US dollar, the reserve currency of most countries, is detrimental to other currencies, especially in times of high volatility in financial markets, as it weakens pars .
As the cost of imports becomes higher, domestic inflation can be triggered, which in turn can reduce purchasing power in the economy.
Rising import costs can also increase the current account (CAD) deficit. From April to July 2022, India’s trade deficit stood at $100.01 billion.
The widening trade deficit also contributed to the weakening of the rupee.
As for the record, the Indian rupee in July fell below the psychologically important level of 80 for the first time as high crude oil prices amid tighter global supply boosted the record. boost demand for US dollars.
However, there is a silver lining.
SBI Research said in its latest report that an interesting development is taking place in the global currency markets as there has been a significant jump in the trading of oil and other commodities in various currencies. currencies such as the Renminbi, Hong Kong Dollar and United Arab Emirates Dirham at discounted prices. price.
“The dollar’s departure has finally occurred, and is it time for India to present the Rupee as a reliable, secular alternative in the changing world order?” SBI Research questioned the question in its report.
Taking into account the share of the US dollar in global foreign exchange reserves, it has been shrinking since the beginning of the twenty-first century, falling by almost 59% at the end of December 2021, from above 70% two decades back. this. .
The RBI also seems to want to ease the dominance of the US dollar when it announced a mechanism to settle payments for international trade in rupees earlier this year, especially for Indian exports. Degree.
That mechanism could help internationalize the rupee in the long run.
