Devaluation of Indian Rupee

Devaluation means the reduction of domestic currency in the International market. The devaluation of the rupee occurs mainly due to the economic crisis. The devaluation is the process that is mainly due to reducing a country's exchange rate in the international market. But this devaluation mainly keeps the internal values unchanged. The devaluation of Indian Rupee is indirectly encouraging exports and foreign currency inflow. The devaluation in India has occurred three times since 1947. 1 USD to INR in 1947 is one rupee. The price of 1 USD to INR in 1947 To 2017 is increased to a great height. Today, 1 USD is equal to 74.22 rupees.  

The entire article gives information about the devaluation of Indian rupees in India. 

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The above image shows the graph of the devaluation of Indian rupees in the global market 

How Devaluation of Currency in India Occurs? 

The USD To INR in 1947 is almost the same. 1 USD was equal to 1 INR in 1947. But now, 1 USD is equal to 74.20 INR. This is mainly because of the devaluation of the Indian currency in the global market.  After Independence, the devaluation of the rupee was majorly carried over by three-time. The devaluation of rupee impacts the external value of the domestic currency. But the internal value of the domestic currency will remain the same. Usually, the country will evaluate their current situation to make an adverse balance of payment in the global market. If the country is facing an adverse Balance of Payment (BOP) situation, then the country will devalue their currency in the global market. This will automatically make cheaper exports and costlier imports. 

The exchange rate mainly represents the nation’s currency rate in the global market to buy the currency of other countries. Usually, the trades and exports in the global market will take place in certain currencies. All other countries can move for trade only through that foreign exchange market. 

Types of Exchange Rate

Usually, the exchange rates are of three types. They are given in detail below. 

1. Floating exchange rate

2. Fixed exchange rate

3. Managed exchange rate

Floating Exchange Rate: If a system allows the country's exchange rate currency to adjust its rate freely depending on the current demand on supply of foreign exchange, then they are known as floating exchange rate. 

Fixed Exchange Rate: If the government determines the exchange rate of the currency, which will not vary depending on the demand and supply of foreign products, then this exchange rate is called the fixed exchange rate. 

Managed Exchange Rate: In the managed exchange rate, a part of the exchange rate was determined by the government, which cannot allow fluctuations for more than 1 to 3 per cent from the determined value. The exchange rate of the system was neither fixed nor free.  

Par Value System:  The par value system was conducted from 1947 to 1971. Under the par value system, all the members of the IMF convert their currencies into gold or US dollars for making trade in global markets. 

After Independence, India started following the par value system by becoming a member of the IMF. On 15th August 1947, the exchange rate of Indian rupees and US Dollars were equal. They do not have a balance sheet. This means, 1 $ is equal to 1 INR.  Due to various other reasons, Indian rupees got devalued in the global market. The major reason for the devaluation of Indian currencies is the economic crisis in global markets and the economic crisis in India. The reason behind the devaluation of Indian rupees is explained in detail below.  

Why Dollar Vs Rupee in 1947 Changed Year By Year? 

During 1947, India did not have any loans from outside of the country in India’s balance sheet. When the British left India, the Indian economy was completely dead due to the absence of capital formation and proper planning.

The government of India did not have enough funds after Independence.  So, the Prime Minister of India, Nehru adopted the model of five year plans from Russia to manage the wealth crunch. During the 1950s and 1960s, the government of India continuously borrowed money from other foreign countries as a loan. Today 1 Russian ruble is equal to 1.01 Indian rupees. 

During the war between China and Pakistan, the government of India faced a severe budget deficit. At that time, the government of India cannot borrow an additional loan from outside due to negative rates. Meanwhile, India faced the India - China war in 1962. 1965’s Indo - Pakistan war pushed the government of India into a huge drought during 1966. The Indian economy faced crippled production capacity and inflation increased the economy of the country. 

To balance the Indian economy, the government of India increased domestic production and adapted to the new technology. Further, the government of India tackled higher inflammation and opened the Indian economy for foreign trade. Later, the economy of India started growing. 

During 1973, the political instability in the Oil Shock created devaluation of rupee. At that time, the organisation of Arab Petroleum Exporting Countries (OAPEC) decided to minimize crude oil production. That results in an increase in the oil import bill. In order to pay the import bill, India borrowed foreign currency, which further reduced the value of Indian currency. Meanwhile, the prime minister of India Indira Gandhi was shot dead, which reduced the confidence of foreigners about the Indian economy. During this time, the USD To INR in 1947 value changed. That time, 1 USD is equal to 17.89 

India faced a huge economic crisis in 1991 and this was the toughest time for the Indian economy. The fiscal deficit of India reached up to 7.8% of GDP. The interest of payment sucked 39% of the total revenue of the government. Current Account Deficit (CAD) covered 3.69% of GDP and WPI inflation reached about 14%. At that time, the international community was about to declare the Indian economy as a defaulter. In order to tackle this problem, the Government of India decided to devalue the Indian currency against the exchange rate. At that time, 1 USD was equal to 24.58 rupees in India. 

Financial experts in India also provided various reasons for the depreciation of the Indian currency against the global market. But the major reason behind the increase in Dollar value against the Indian currency is mainly due to the US federal bank, which appreciated the dollar value. The list of other reasons is given in detail below. 

1. As their import bill on petroleum products changes often. 

2. Huge quantity of import of gold in India. 

3. People in India import huge luxury goods. 

4. Indian Rupees spent for the Pokhran-II nuclear test. 

5. Financial crisis faced by Asian countries in 1997.

6. 2007 -08 global financial slowdown 

7. 2011 European sovereign-debt crisis

All these are the major causes for the devaluation of Indian rupees in the global market. The dollar rate in 1947 was rupees 1 in India. Later, in 1947 Indian currency devalued for all the above-mentioned details and now 1 USD is equal to 74.20. 

The below table shows how the INR devalued against the US dollar from 1947 to 2021. 

This entire article explained the devaluation of Indian rupees and the reason behind it. From this article, we came to know about the status of the Indian economy and how they overcame every crisis. The devaluation of the Indian currency will result in costly imports and cheap export in the global market. This will automatically improve the Balance of Payment of the domestic country.