The trends in rupee depreciation since 1947

         TRENDS IN RUPEE DEPRECIATION SINCE 1947

Most of the Indians are not aware of the fact that the value of Indian currency was equal to that of the dollar in 1947. Then how come it got depreciated in such a manner? There are many reasons that led to the downfall of the rupee step by step since independence which finally had its value as 67 INR a dollar.

THE REASONS FOR THE DEPRECIATION:

1947 - 1967:

1) The Indian rupee was compared only to the British pounds until 1947. Then we had the rupee value equal to that of the dollar value. We did not even need any foreign borrowings at that time. But the emergence of the first five year plan made a requirement of huge finance investments leading to the external borrowings. The demand for the borrowings introduced the concept of rupee devaluation in the Indian economy.

2) India followed a “fixed rate currency” regime in which the governments try to maintain their currency value constant against one another. Here the government decides the worth of its currency in terms of either a fixed weight of gold or fixed amount of another currency. The sudden shift in its regime to liberalize the policies led to the fall of rupee.

3) One should understand that the increase in the rupees lead to decrease in the dollars. The budget crisis in the government have given rise to large supply of rupee in the market increasing inflation which tended to increase the prices of our economy compared to that of the world, increasing the imports. This increases the current account deficit leading to balance of payments crisis and rupee depreciation.

4) The external factors to be noted are the wars with China and Pakistan in 1962 and 1965 respectively. The countries favorable to Pakistan withdrew their support for India. The wars made the government of India to spend most of the budget towards the war accelerated inflation. There was a foreign aid available to meet the needs but it was never greater than the deficits but it helped the rupee to stand stable at least until 1966. After 1966, the foreign aid was withdrawn demanding the liberalization of the Indian economy. So the rupee got devalued further.

5) The severe drought in 1966 was another important factor that led to the scarcity of budget increasing the prices and devaluation of the currency.

1967 - 2000:

1) The rupee had already depreciated due to the above reasons till 1967. In 1971, India totally broke the relations with the British pounds raising the demand for the dollar at once. The rupee got devalued further then, as the demand for the dollar was in a hike. The Indian rupee was then linked with the American dollar, Japanese yen and Germany mark by 1975.

2) Balance of payments crisis got increased in 1991 and forced the rupee to get devalued. There was high inflation, low growth and foreign reserves which were not even worth to meet 3 weeks of imports and many economic problems in the society. So the Indian currency devalued further.

2000 – Present:

      1)      The 2008 global economic crisis further made the Indian currency to devalue. It touched the high in          2007.

      2)      The strong demand for dollar from the Indian corporates which is leading to the rupee depreciation           now.

      3)      India imports crude oil from the countries which only accept dollars and other major currency. This gave an increasing demand for the dollars in the Indian market leading to the depreciation of the rupee.

THE TRENDS IN RUPEE DEPRECIATION:

Year	Trends in Rupee Depreciation
1947	1
1966	7.50
1975	8.39
1980	7.86
1985	12.38
1990	17.01
1995	32.42
2000	43.50
2005	43.47
2006	45.19
2007	39.42
2008	48.88
2009	46.37
2010	49.21
2011	55.39
2012	57.15
2013(May)	54.73
2013(August)	67

FEW SOLUTIONS TO OVERCOME RUPEE DEPRECIATION:

      1)      The government should cut down the fiscal deficit bye raising the prices of petrol, diesel, kerosene and LPG. The costlier the prices the lower would be the consumption leading to decrease the imports and trade deficit.

      2)      The goods and services tax should be implemented so that the exports become cheaper bringing down the current account deficit.

      3)      The government should stabilize few sectors like retail, insurance, airline etc., inorder to attract the Foreign Direct Investments.

      4)      There should be a development of internal infra projects in the country leading to development and appreciation of the rupee.

      5)      Should largely focus on oil & gas and gold imports. We are mostly spending the dollars on gold which is one of the largest imports. Need to reduce the imports of gold so that the dollars are used on other important imports.

MY PERSPECTIVE:

The value of the rupee has undergone many changes since independence. It got depreciated for certain reasons. We cannot blame any of the politicians for this downfall. The concept and solutions seem to be easy to read about but it is too tough in the practical world. The excess supply of money by RBI earlier was the major reason for the rupee depreciation, they say. The solution when we read is simply understood to limit the money supply but the consequent effects of this on the society can never be understood by the common readers other than the people taking decision directly. If we limit the money supply, the economic growth of the country comes to a halt for several years which cannot be the apt solution for this problem. In the same way every solution has many effects on the society, not only controlling depreciation but also leading to some economic problems. So I feel that, we have to let the rupee raise and the politicians must face the consequences of it until it reaches an equilibrium point where it stops depreciating increasing its demand in the foreign market.