India is celebrating its 75th year of independence and is at the crossroads to deliver resilient economic growth for its population over the next 25 years – what the government calls the country’s ‘Amrit Bald’.
Leaving aside other aspects of the economy, let’s take a look at how the Indian rupee has fared against other global benchmark peers since 1947. The value of a country’s currency is an important indicator for measuring its economic path.
Much has happened on the macroeconomic front since 1947, including the economic tensions of the 1960s, led by a decline in food and industrial production.
Then came Indo-China and Indo-Pakistan, which increased spending and caused the balance of payments crisis.
With high import bills, India nearly defaulted as foreign exchange reserves nearly dried up.
According to reports, the then Indira Gandhi-led government had to face a steep devaluation of the rupee. The value of the rupee fell from Rs 4.76 against the US dollar to Rs 7.5.
In 1991, India found itself again in a severe economic crisis as the country was unable to pay for its imports and meet its external debt obligations.
Again, India was on the brink of default, requiring much-needed reforms to open up the country’s economy.
To counteract the crisis, the Reserve Bank of India reportedly devalued the rupee in two sharp tranches: 9 percent and 11 percent respectively. After the devaluation, the value of the rupee against the US dollar was around 26.
From Rs 4 during independence against the then British pound to about Rs 79 to Rs 80 against the US dollar, the rupee has fallen in value by Rs 75 in the past 75 years.
“The weakness of the rupee in these years has been caused by many factors, with the trade deficit now rising to record highs of $31 billion, from almost no deficit at the beginning of independence, mainly caused by high oil import bill,” said Gaurang Somaiya , Forex and Bullion. Analyst, Motilal Oswal Financial Services.
“We expect the rupee could fall further against the US dollar, but the pace of depreciation could slow down due to a huge war chest that the RBI has built up in reforming its foreign exchange reserves,” added Mr. Somaiya ready.
While the declining rupee may not benefit the entire economy, a devalued currency has its advantages as it helps boost exports.
Since the economic reforms of 1991, the rupee has fallen in value by 3.74 percent on CAGR (compound annual growth) against the US dollar because of the inflation and interest rate differential between the US and India, said research analyst Dilip Parmar. at brokerage HDFC Securities.
Between 2000 and 2007, the rupee stabilized to some extent, led by significant foreign investment pouring into the country, but later declined during the 2008 global financial crisis.
“If we look further into the past, we see that a major depreciation has started from 2009 onwards, from 46.5 to now at 79.5, 4.3 percent CAGR compared to almost unchanged from 2000 to 2009, of 46. 7 to 46.5,” Mr Parmar added.
The US dollar, the reserve currency of almost all countries, is detrimental to other currencies, especially in times of high volatility in the financial markets, as it weakens the currencies of comparable countries.
As import costs rise, domestic inflation can be triggered, which in turn can reduce purchasing power in the economy.
Rising import costs can also increase the current account deficit (CAD). For April-July 2022, India’s trade deficit was $100.01 billion.
A wider trade deficit is also contributing to the weakening of the rupee.
For the record, the Indian rupee fell below the psychologically significant level of 80 against the US dollar for the first time in July as high crude oil prices amid tighter global inventories boosted demand for the US dollar.
However, there is a silver lining.
SBI Research said in its latest report that there is an interesting development in the global foreign exchange market as there has been a significant jump in oil and other commodities trading in currencies such as the renminbi, Hong Kong dollar and Arab Emirates dirham at discounted rates. .
“Finally, the dollar is moving away and is it time for India to raise the rupee as a credible, secular alternative in the changing world order?” SBI Research questioned in its report.
As for the US dollar’s share of global foreign exchange reserves, it has been shrinking since the early 21st century, to nearly 59 percent at the end of December 2021, from more than 70 percent two decades ago.
The RBI also appears eager to reduce the US dollar’s dominance as it announced a mechanism earlier this year to settle payments for international trade in rupees, especially for India’s exports.
That mechanism could help internationalize the rupee in the long run.