OHAPI'ER - I

.EXTERNAL VALUE OF THE INDIAN RUPEE

QHAPI'ER - I .. EXTERNAL VALUE OF THE IN DIAN RUPEE

In the early parts of the 19th century, there wae no

uniform currency system througmut India. After ta. breakdown

of the Moghul inpire, a number of independent State·• were eet

up and each state struck its own coin to indicate ite sovereignty.

There was a st@ering multiplicity of indep&ldent ooine. This

caused serious difficulties for the sroooth flow of internal end

external trade.

Currency Act, An attempt was made to introduce a uniform 3835

currency system by the enactment of the Currency

Act of :1835. Under this Act, the silver rupee, weighing 180 grains

of which 165 grains were of pure silver, was made the standard

coin. The face value of the rupee was made eaual to its intrinsic

value and every one was permitted to take silver to the mint

and get it coined into rupees free of charge. Trough gold coins

ceased to be legal tender, free coinage of gold was permitted

and g>ld Mohurs of the denominations of Rs. 5, 10, 15 and &>

could be minted. The Act fixed the rate of exchange between

gold ana silver at Rs. 10 per sovereign or Re. 1 = 2 shillings.

Trough gold coins were allowed to circulate, they were no longer

accepted as legal tender and therefore this Act of 1835 was

said to have introduced silver monometallism or silver standard

in India.

2

During this period, there was increased mnetiaation of

the Indian economy. The system of payment of land re'feaue in

cash, in place of the old system of payment in grains, ae

introduced s• nore and mre lands passed into the hsndt o t the

Britiah. Moreover, the Go":ernment of India had to make annual

payments to the British Go1'ernmErlt for 'lbme' charge• (a&lari

end peneions of Britjsh pereonnel serving in India, in\erest for

loene, India Office expenses etc.). Since cash was requ.ired

for this purp>se it became necessary to get revenues in cash.

Rise in the There was a great demand for the supply ~f currency. ·

supply of .,India absorbed e.ll of the world silver produo-currency tion as its currency - which was silver - exPended

in 18a6-1866 mainly because of expenditures there tor railroad

tuilding, the costs of putting down the so-called mutiay of 1857,

and supplying cotton to England during the American Ci Yil War •• 1

Fall in the value of silyer

Blt the continuous tell in the value of ailYer

e.fter 1870 was a matter of concern for the

Government of India. Two main reasons of thia

fall in the value of silver were ( 1) increaeed annual eilyer

production (mainly due to Wlpreoedented increase in Kcican

silver output) end { ii) dErJOnetisation of silver by many

:mtropee.n coWltries end the U.S.A. The following. Table indicat

increase in silver production from 1856.

1. Sydney E. Rolfe end James L. lhrtle in "The Great ~keel -The \\brld Monetary System". Macmillan, 1973, p.S.

IBte

1856-60

1861-1B65

11366-1870

1871-j876

~76-:tBSO

1881-1886

:1886-1890

1891-i895

1896-1900

1901-1905

1906-1910

1911-1920

Table 1.1

Average annual silver production (Kg.)

904,990

1,101,160

1,339,086

1,969,425

2,450,252

2,808,400

3, '937 ,532

4,901,332

5,31)4,551

6,226,121

6,136,348

5,906,_681

{ fburce : Karl Helfferich, Money (New York; Adelphi, 1.927)

quoted in Sydney E. Rolfe end James L. :Blrt le in •The Great

Wheel - The Vbrld Monetary System• Macmillan, 1973, p. 6 .)

There were new discoveries of silver in Nevada end the

glut of silver in the world market was swollen by the disconti­

nuance of the free coinage of silver in the United states in

1873. "The o verabmdant si 1 ver at first began flowing into t:

monetary systems of countries wknse silver or bimetallic standards

4

still guaranteed a market for it. These countries faced tt.

threat of monetary inflation end a oorresp>nding drop in t,he

blying JX)Wer of their money units. Suspending

the free coinage o! silver seemed to offer the

])m:)netisa­tion of silver in Europe

only protection. France and her a!sooiatel in the

Latin Monetary Union limited the coinage of etend.ard eilttr

pieces in 1874 and entirely discontinued it in 1878, tbla trene­

forming their bimetallism into a 'limping f!Pld standard'. lblland

and the Scandinavian countries acted similarly. Gold replaced

silver as the standard money in all European countries eJ:cept,

the few sti 11 on the irredeemable paper. The oo llapse in the

monetary demand for it of course made silver depreciate all the

more sharply in relation to gold".2 The Latin lonetery Union

referred to here oonsisted of Frenoe, Belgium, SWitzerland, Italy

end Greece. In the United States, trough the ())ngress oaitted the

silver dollar from the list of cnins to be minted in 1873,silver

mine interests wanting price support for their product, succeeded

in securing the passage of the Bland-Allison Act of 3878 and the

Sherman Silver F\lrchaee Act of 1690 under which the Treasury bad

to hly specified amounts of silver and issue corresJX)nding rumunte

of silver dollars or silver certificates. Blt when the money

issued threatened to exhaust the country' a gp ld reserYt end

a forced abendoPment of the g>ld standard, President Oleyeland

persuaded the Congress in i893 to repeal the Silver Purchase Act.

2. Leland B. Yeager in •International Monetary Relatiens• Harper and Row, New York, 1976, p. 297.

Fall in the value of the Indian rupee

JB.te

1871-72

1876-77

1881-82

1886-87

1891-92

1893-94

5

The fall in the value of the Indian Rl!pee

after 1870 will be evident from the follfwing

Table :

Ta.gle 1.2

Valm of the Rupee,

d. (pence)

2'%..1 "'g

2ot 19~

17~

~ 14i

( &Jurce : R.C.Dl.tta. in 'The Economic History of India', Vol.II ·.Publications Division, Cb"fernment of India, April 1970, adapted from Tables in Chapter 12).

The fall in the value of silver end of the Indian

rupee was not a loss to the people of India; the export trade ef

India rather benefitted by the depreciation of silver. Jht

the Government of India had to remit large sums of moaey to

England as lbme Charges in gold annually and falling Yalue

of silver meent en increasing emount in ailver for these payments.

6

In November 1878, IDrd Lytton pro}»std. some lord Lyt,ton' s prop> sal

steps for raising the value of the rGpee by

limiting its coinage and subnitted a draft Bill in thia oonnec-

tion to the Secretary of state for India wm, in tum, forwarded

it to Sir stafford Northoote, Chancellor of Exchequer. It was

ultimately referred to a Committee. The IDrds of the Treasury

declim d to supp>rt the proposal and replied that the prop> sal to

raise the value of the Indian rupee, if accepted, may benefit

English civil servants and investors in India and relieve

the Indian Government from the inconvenience of nominal

re-adjustment of taxation blt this relief would be at the expense

oft~ Indian texpayer end wouli increase every debt or fixed .•

payment in In die., including debts due by ryots to money lenders.

' IDrd Dlfferin' e IDrd Dlfferin, the then Viceroy of India, proposal

referred the matter again to the Treasury in

1886 but the British Treasury replied that the fall in the Y&lue

of silver has given stimulus to the export trade of India and

werned against rashly meddling with a condition of things which

have brought to the people of India more of advantage than of

loss. ·

Herschel! Cormnittee

Blt the value of the Indian rupees eo~tinued to

fall and slumped to 14.5 pence in 1893-94. At

this time, the question of the Indian Currency was reftrred to a

Conmittee of which. IDrd Hersohell, the then IDrd Ohencellor wae

7

the President. The Connnittee, in its re:p>rt subnitted in Kay,

1893 recommended the closing of Indian mints to the free coinage

of silver. lbt the Indian Government smuld undertake to

issue rupees in exchange for Gold at the ·rate of 1 a. 4 d. per

rupee end emuld receive British soyereigns in payment of

Government dues.

CUrrency Act, 1893

The Currency Act of 1893 was passed in June,

1893 eml:ndying these pro!))sals and the Yalue of

the rupee began to rise in subsequent years. In 1896-97 the value

of the rupee was 14.4 d. .It rose to 16,3 d. in 1897-98 and fur-

ther roae to 16 d. in 1898-99. This was the value suggested by

the Herschell (l)mmittee and the (bvernment of India asked lord

George Hemilton, the then Secretary of statee, to devise

measures to fix the rupee at that va.lue.

Fowler Cormnittee

The Secretary of state apJX)inted in U398 a

Cbmmittee with Sir Henry Pbwler as ita Chair­

man. It may be mentioned here that Sir Henry Fowler was himself

the Secretary of State for India in :1894 and 1896 when the Indian

mints remained closed and the value of the rupeea began to rise

and therefore he was unlikely to ouest ion that p:> licy. fowler

Conmi ttee subnitted its rep:>rt in 1899 ~ It reoormnended that the

British &>vereign sb>uld be introduced ae a current coin and

made legal tender in India. The exchange value of the rupee

smuld be fixed at 1 s. 4 d. The Fowler Cbmmittee observed,

8

•we see no sufficient reason for altering the existing relations

of prices and the essential conditions of contracts exprened in

Indian Currency, or for reversing the course of exchange and

returning to some be.sis of value which may have preya.iltd during

the interval between the fall and partial recovery in the aterlirg

value of the rupee, and which does not possess elements ot per­

manent stability in a higher degree than t,he present rate. We

are, therefore, of opinion that the permanent rate amuld ~be that

which has been adopted as the provisional rate in the pe.Jtt,,end

which is also the market rate of to-day, viz. 1 •· 4 d. tar the

rupee •• 3

The llbwler Cbmmittee also reoonmended that the Indian

Government st»uld, witmut undertaking to give ~ld for rupees

at 1 s. 4 d. per rupee, make a gold reserve to be available for

foreign remittance. An Act we.s accordingly pe.ssed in 1899.

Controversy aoout the 1 s. 4 d. rate

The fixing of the value of rupee at 1 e. 4 d.mes.nt

that the interest of the Indian people was

saori fi ced to faoi li tate payment of Ibme

Charges. Even the British economist Sir Robert Giffin in his

evidence before the Fbwler Committee condemned an artificial

currency for India and oo ldly suggested the reduction of lbme

Charges. Of the two Indian witnesses, Ur. R~stomji suggested

3. Report of the Fowler Committee of 1898 in "Reports ot Currency Oormnittees•. Government of India.,Centra.l FUblica.­tion Branch, Calcutta 1928, p. 89.

' 1 s. 2 d. end R.C.llltta recommended that the value of the rape• smuld not be artificially fixed a.t all. The artificial nd1aing

of the value of the rupee, he opined, would. mean e. general

increase in taxation, add to the profits of the rich JII)ney­

lender and enhance the debt b.trden of the poor cultivator.

According to J)tde.bbai Naoroji, •By closing the mlnte

this rupee is forced up to the worth of 16 d. of gold, and the

rayot is compelled to find this high-priced false rupee

of 16 d. of gold, or, in other words, to sell 45% more ef hie

produce to get this false rupee, the Government thus gttting 45~

more taxation than it is entitled to, even according te its

own 'des,!X)tio' legislation•.4

R. c. Dltta estimated in }X)und sterling tm in.crease of

taxation during the period 1897-98 to 1901-02 and sait that

"taxation in India has been increased by 12 millions sterling

mainly by the artificial raising of the value of the rupee•. 5

Tmugh the Jbwler Corrmittee intended the ultimate

establisbnent of Gold standard with gold currency in India,

the currency system of India steadily deviated from it end

gradually evolved into the Gold Exchange standard. As Keynes

has observed, the Government of India drifted inte it. 6 Because

4. IBdabhai.Naoroji iiJ. •Poverty and un-British rule in India• Publicat1ons D1 vis1on, (byemment of India, 1969, pp. 604-605.

5. R.C.Dltta in "The Eoonomio History ot India.•, Vol.II, Publications Division, Government ot India, lt70, p. 436.

6. J.M. Keynes, "Indian Currency Md Finance", laomillan, london, 1924, P• 34.

10

of technical difficulties raised by the British Treasury \be

scheme :fo.r opening a mint for g>ld coinage in India. had te be

dropped.

Gold Exchange standard

People smwed a marked preference for ru;pee

ooins and were anxious to p1rchase rupee for

gold as gold was depreciating in value, As a result many ef the

gold coins were returned to the Treasury and the Government had

to resume the coinage of rupee in 1900.

The working of the Gold Etchange standard in

India depended on the sale of Council Bills end Reverse Cbuncil

Bills. Before 3893, ())uncil Bills were sold only for meeting

lbme Charges tnt after 1893 these Bills were also used for nor­

mal trade purtnses. Whenever India had a favourable balence of

trade and the British importers wished to remit gold to India,

the Secreta;ry of state for India accepted gold end sold ())uncil

Bills to British merchants woo sent it to the Indian experters

to take payment in rupees in exchange of the Bill from the

Government of India. In 1904, the Secretary of state for

India announced that (l)uncil Bills would be sold witmut

limit at 1 s. 4-VS d. per rupee - the gold export point from

london. Silver was JUrcha.sed out of these proceeds in IDndon

and sent to India for coining the silver into rupee.

Difficulties arose when India suffered from an adverse

balance of trade in 1907 due to oro p failure. Thare waa a

11

heavy demand for sterling in exchange of rupees from Indian

im}X)rters and this caused the rate of exchange to fall below

1 a. 4 d. - as low as 1 s. 3-~/32 d. on 23rd November, 1907. A

solution was found in the sale of Reverse Council Bille in

India at a rate not below 1 s. 3-29/32 d. per rupee to Indian

im}X)rters wm sent these Bills to their lDndon Creditora tor

presentation to the Secretary of state. The Secretary t!

state paid these bills in sterling from the Gold standard

Reserve and Paper Currency Reserve located in london. Ttua

the sterling or gold value of the rupee was maintained

between 1 s. 4-1/8 d. (upper specie ];X)int) end 1st. 3-29/32 d.

(lower specie point) through the sale of ())unoil Billa and

Reverse Council Bills.

Chamber lain Commission

In 1913 a Royal Commission of Indian Currency

and Finance was constituted under the Chair­

manship of Joseph Austen Chamberlain to enquire into tbe metmds

of rila.intaining exchange and the location and use of tbe reseryea

and balances. T~ O:>mmission approved tm various measures

taken by the Government of India to stabilise the exot.mge rate.

According to the Oomrnission, Gold Exchange standard waa

not only workable tnt it eminently suited India on account of

its oheap1ess end the absence of a well-developed bmking system

in India. In the Cbmmission's view, "It would not b& to India's

advantage to encourage en increased use of gold in the internal

12

circulation" as "the people of India neither desire nor 11eed

any considerable amount of gold for circulation as ourreacy,

and the currency mat generally suitable tor the internal neede

of India consists of rupees and notes. •7

Breakdown of the Gold Exc],..,."'rt'C

The Gold Exchange standard worked well till the

out break of the First Vb r ld ihr in 1.914-. st~~d

Certain developnents follewed which made the

working of the (bld Exchange standard very difficult. The main

causes that led to tm breakdown of the Geld Exchange standard

were (a) ·India's war time favourable balance of trade due to

large purchases made from the Indien market by Great Britain '

· end her allies end (b) rise in the price of silver dae to

decline in the world production of silver and its increased

demand for currency purl» sea. T~re was a great demand in

Great Britain for Indian rupees ( Cbunoil Bills) for making ~y­

ments to Indian exporters. In order to meet this demand, the

Government had to p1rohase silver at a rising price in the

london market for coinage of rmre rupees. In 1.917, the co et of

coinage of one rupee coin became 1 s. Bi· d. and so the main­

tenance of the rupee-sterling rate at 1 s. 4 d. became difficult.

Tbs price of silver rose from 27i d. per standard ounce in 1914

to a little more than 43 d. in August, 1917 and 55 d. in Sept _

ber, 1917. The prioe of 43d. per standard ounce ia significsnt

7. Rep3rt of the Chamberlain Cbnmission in Rep>rta of Currency Committees, op. cit., p. 179.

13

b3cause at this price the exchanp value of the rupees was

eqni valent to its bl~lion value. If the price of ailYer nse

higher than 43 d. per ounce, tm exohange value of the rupee

conld not be maintained at 1 •· 4 d. a.e the rupee became wrth

rrore than 1 s. 4 d. in g>ld. In that case it the Government did

not give more than 1 s.4 d. in exchange for a rupee, the rupee

itself would be melted or exported. Actually the newly iealled

rupee coins were ttns disappearing from circulation tlf>agh

melting. Therefore with every rise in the price of ailter

aoove 43 d. per standard ounce, the Government he.d to raiae the

rate of exchange accordingly. Tms the Gold Jtcb.mge standard,

which depended for its success on the maintenance of the

stability of the exchange rate at Re. 1 = 1 •· 4 d. and oa the

rupee remaining a token coin, broke down.

The exchange value. of' the rupee increased to 1 a. 6 d.in

A~st 1917, 1a. 6 d. in April• 1918, 1 s. 10 d. in August,

19:19, 2 e. in Sept,ember, 1919 end 2 s. 4 d. in tecember, 1919.

The contimtously increasing exo.bange value o t the rupee

inflicted a severe blow on the Indian trade and industry and

the metallic reserve behind the Indien ourrenoy was reduced

from 79, in 1914 to 60% in 1919.

lkbiMton•Snith After the First WJrld War, a Qlrrenoy (bomittee

Cbmmittee was ap:plinted in 1919 under ~he

Chairmanship of Ba.bingl;on-Snith. After taking into account tm variations in the price of silver and poasi ble future changes,

14

the <bnmittee reoommended that the exchange value of the rupee

smuld be fixed e.t 2 fh (Gold)'. The Cbmmi ttee also reoomrnended

that the rupee a.s well as the sovereign smuld be declared

unlimited legal tender at the rate Fa. 10 per sovereign. The

advantages claimed in favour of the high exchailge rate for tbl

rupee were that it would cheapen imported materials and that

tmre would be e. saving of a.b:>ut ~. ~ crores.s in the Fbmt

Charges. Indian ex}X)rts, according to the Oorrmittee, would not

suffer as, owing to the general smrtage of materials and leod

stuffs, there was great demend for Indian goode in the world

market.

fro'YI'I The new ratio, adopted,.February 2, 1920, did not last

long. It fixed the price of g>ld at ~. U>-14-0 pies per tola.,

tnt the actual market· price rJf f!P ld at that time. was ~. 23-8-0

pies per to la.. Adverse balance of trade for India in the :p> at­

war period, in.oreased remittances of profit to »tgland, Md

increase in speculative activity led to a great demand for

sterling in India. The exchange rate continued to fall and osme ;

down to 1 s. 3-13/32 d. by July, 1921. The ba.le.nae of trade

turned favourable to India in 1922 and the aterling value of

the Rupees rose gradue.lly to its pre-war level of 1 s. 4 d.

sterling in Jenuary 1923. The exchange rate rose to 1 •· 4 d.

8. Rep:>rt of the Be.bi~on-anith Cl?mmittee in "Rer»rta of Currency Cbmmittees • op. cit., p. 271.

sterling or amut 1 a. 6 d. g>ld in October, 1924 and Cbn-rn­

ment action was now directed to prevent the rate from ri•i:~

further. This p>licy was followed upto 1925 when Fngland.

returned to the Gold standard.

Hilton Young Cbnmission

Now the Government of India apJX)inted &

Commission under the Cba.irmenship of Kr.

Hilton Young on A~st 25, 1925 to examine the Indien Ourrenoy

System and to make reoommendations reg~ding the monatary

standard, the rupee-sterling ratio and the establisbnent of a.

monetary Blltmrity. The ():)nmission -recommended the introduc-

tion of the (bld Jilllion Standard in India. The internal

currency would consist of silver rupee and notes and these notes

end silver rupees 'IOUld be convertible into g>ld l:nllion at

cerlain fixed rates in quantities not leas than 400 fine ounces

(1065 tolas). As tor the exchange rate, the ())omission reoonmended

that the exchange value of tM rupee smuld be fixed at 1 s. 6 d.

(8)ld) per rupee which would make the ya.lue of the rupee in term1

of gold equivalent to 8.47512 grains of fine gpld.

Currency Act, The Governaent accepted the reoonmendations of 19Zl

tm <bumission and the Cllrrenoy Act of 1927 was

passed accordingly. This Act established 1 s. 6 d (s>ld) ratio

by im:p>sing the obligation on the Government to PJrohase gold

at 21·3-10 pies per tole. in the form of bars which amuld oontain

not less than 40 tolas or 15 ounces of g>ld and to aell gold for

deli very at Ibm bay or sterling for deli very in london iA anl)unts

of not less than 400 ounces or 1065 tolas of fine gold t,r the

equivalent amount o t sterling. The Government could exebange

rupee into either gold or sterling according to its diaoretion.

Therefore the new rmnetary system could as well be called Gold

~llion-cum-sterling EXchan~ standard.

Ratio oontro versy

The recommendation of the majority o.t memtara

of the Hilton Young ()>rrmission of ttt. ratio at

1 s. 6 d. (g>ld) per rupee aroused a great oontroveray in India.

Indian :plblic opinion, represented by Sir Pursmttemda.s Tba.kurdas,

a. member of the ())nmi ssion, favoured the fixation of the ratio at

1 s. 4 d •. Majority members favoured the 1 a. 6 d. per rupee in

place of 1 s. 4 d. on the grounds that prices in India had

attained a substantial measure of adjuatmerlt with world prices

at this level, revereion to 1 B• 4 d. ·would raise general price

level, cause hardship to consumers, reduce the real wage o t lamurers end increase the blrden of lbme Charges.

Sir Pursmttemde.s Tha.kurda.s denied the.t Indian prices

had adjusted to world prices at 1 •· 6 d. This ratio wa.s

artificially v;orked up by deliberately contracting currency.

He was of the opinion that 'this ratio gave the foreign

manufacturers en indirect tnunty of' 12t~ end placed a heavy

strain on Indian industry. It would also inoreaae the debt,

hlrden of the };Oor peasant debtors by 121%. He }Dinted out

17

t~t the increased l:nrden ot payment of Ibme Ohergea at 1 a. 4 d.

could be met from increased taxes on account of industrial end

agricultural prosperity.

Economic oondi t ions in au bsequent years in India

provided some evidence that at 1 s. 6 d. the Indian Rupee

was overvalued. In order to maintain this rate, the GoY&rmrent

had to' contract. currency to the extent of alnut Ps. 102 ororeB

in f'i ve years upt;,o 1931. The resultant tall in prices caused

much lo as to Indian oulti vators and manuf'e.oturers. Dlring the

Great Depression prices in India fell relatively more tb&n the

prices in foreign countries end terms of trade became

unfavourable to India. The rumunt of surplus in the balance of

trade was considerably reduced.

Heavy outflow of g>ld from the Be.nk of Bhglsnd dae to

withdrawal of foreign balance during tm Great Depression of

1923-31 made it difficult for Britain to fulfil l'B r obligation

to maintain tl'B convertibility of sterling into epld. Great .

Britain went off the Gold Standard in September, 1931.

Following the foot steps of Great Britain, the sterling Exchange standard Government ot India suspended its obligation to

bly and sell g>ld bars in exctange of rupee and rupee notes.

Tbls the (bld Blllion Standard was abandoned. The ())yernment of

India decided to maintain the link of the rupee to eterlirg at

the rate of 1 s. 6 d. per rupee and to bly and sell sterling at

fixed rates. This new system came to be known as sterling :Exobulge

standard.

18

Government of' India. claimed that it was adYsnt.ageoua

for India to stabilise the value of' the rupee in terma of ster­

ling as the greater :r;x>rtion of India's foreign trade n.s with

the Sterling Area. A stable rupee-sterling ratio would fe.ai litate

the payment of Ibme Charges. Also, it would give a atiulue

to India's exp>rt trade to the oountries ths.t still n•ined on

tl'e gold standard (U.S.A., France, Belgium, etc.} beca~ae the

pri.ce o t gold was rising and linking the rupee to sterling meant

e. depreciation of the rupee in r.elation to ePld.

Indian public opinion was generally in favour et delinking the rupee from sterling. If the link was at all to be

maintained, the overvaluation of the rupee was to be corrected

by establishing a lower ratio then 1 s. 6 d. per rapee. By linld~

the rupee to the sterling, prices in India were made dependent

Up::ln British prices and India was made to share the fluetuations

of sterling and imtnrts .from coUntries still on gold stede.rd

were adversely affected.

The fall in exports due to the Great ~pression led to

a huge outflow of @Pld from India. Between 1931-32 end 1939-40

8)ld bllliort worth over il. 382 orores was ex].X)rted from India.

Effect of Second · _ \l)rld War

D.lring the Second Vbrld War period considerable

purchases were made ~ Britain and her alliea

from the Indian market. Payments were made to the Indian aerobant e

neither by sending gold nor by exp>rt of EJ>Ods to India.Pe.ymenta

19

were made in sterling which accumulated to the credit ef 'bhe

Government of India. Against these sterling bllances the leeerye

Benk of India i asued rupee notes to make payments to the Indian

merchants on behalf of Britain and te r allies. This resulted

in severe inflation and consequent economic distress to the

Indian people. Reserve Bank of India, under the Reserve Bank

Aot of 1934, was under obligation to pay rupees in exchange of

sterling. This provision of the Act was taken advantage of

to make rupee payments to the Indian exporters in the manner

stated aoove.

The Post-\\brld War II international roonetary India's :Uemb3r-sbip of the system was designed e.t the Bretton ibode I .M.F.

Conference in the U.s.A., which opened on lst

July, 1944. The International Monetary Fund we.s formally eata­

blished on the 27th December, 1945. India is a founder·m•ber

of the I.M.F. As the U.s.s.R. refused to join the I.Y.1'., mr

quota was offered to India. India I:'Ubsori bed to the quota of

.S 400 million in full e.rld became one of the Big Five (others

being u.s.A., U.K., China and France) with a permanent seat in

the B>ard of Directors.

Gold Parity standard

On September 12, 1946, the I~K.F. requested .ch

member "to communicate within 30 days the pu-

value of its currency based on the rates of exchange prevailing

on October 28, j946 ... the 60th day before entry into force of

the Agreement •.9 The prevailing exchange rate of 1 s. 6 d. to

9. First Annual Report of the I.U.F., p.16.

20

one Indian rupee was accepted by the I .M.F. blt it was now

linked to gold and the Indian rupee became equal to 0.268611

grams of fine gold and to 3:).225 cents in terms of the U.s.

dollar1. This .led to the end of the Sterling Exchange Standard

and the introduction of the I .M.F. standard or Gold Parity

ste.ndard. Sections 40 & 41 of the Reserve IWlk of IncUs. Act,

1934 were repealed by an amendment of the Act in April, 1947 and

the Reserve Bank's obligation to tny and $ell sterling at spe­

cified rates was replaced by the provision that the Reserve Dulk

Illy and sell foreign exchange at such rates and on such terms

and conditions as. \\Ould be detennined by the Central Government

from time to time. The Reserve 12nk was aleo autb:>rised to b:>ld

other than sterling securities in the 40% currency reserve it bad

to b:> ld at tha.t time.

With generous foreign currency loans from the I:Ur, the

Reserve Bank of India succeeded in maintaining the stability

of the exchange value of the rupee. Blt the ~und Sterling

became weak. llie to recession in the U.s.A., U.s. merchandise

imiX>rtS fell sharply and in the eleven weeks until September

:lB, :1949, the reserves of Britain fell nearly 20~ end we.s

reduced to 8 1340 million. or only aoout ha.lf the eri.d-of-

1946 level. Tm accumulated outflow of reserle reached en

atnorma.l rate of almost ! 1.4 billion.

"'n September 18, after consultations with the

International Monetary :FUnd eo scant as to·\ be ha.rdlY''fiJ're tmn ' ., ..... ·.

f ~ ·• ....

-; TG~) _'Z_- \ ~:g·~-

21

mere notification, the British Government announce4 a deYalua-

tion of the Pound to .S 2.80. Its sharpness, 30.fi<.JHr•~t.- 01111 &I a

surprise• •10

Within one week 23 countries followed the British IIDVe

and seven more followed later on. The devaluing ~untriea,

accounting approximately for tYtO-thirda of world t~de, included

the entire sterling Area (except Pakistan) PB well as Canada and

many other countries of importance in world trade.11 The main

countries which did not deve.lue their currencies were u.s.A., Switzerland, Turkey, Brazil, Pakistan, Japan and the Socialist

countries.

On 20th September, 1949, India. devalued the Devaluation of the Indian · · rupee in the same pl;'Oportion as pound sterling ru~e in Sept., 19~9 in terms of the U.S.dolle.r. Indian rupee

became equal to 21 cents in tenns of the u.s. dollar

and to 0.186621 gra111s of fine gold. The rupee-sterling ratio

rem.e.ined unchanged at 1 a. 6 d. per rupee.

Devaluation of the Indian rupee in 1949 was ac.t deli­

berate. It was a defensive measure solely for the purpese of

safeguarding the country' a foreign trade p>sition. A~ut 75~ of

the export trade of India was. with countries which deTalued tt ir

currencies and India had many of the competitors for her exports

10. Leland B. Yeager, op. cit., p. 445. 11. Federal Reserve Bank of New York, Annual Report tor 1949,

pp. 32, 36.

within these countries, such as Ceylon in Tea, lancashire in

piece gpods, ~t Africa in ~und-nute, Seuth Africa iR ~eee and tundee in jute goods. Under these circumstances failure to

devalue the rupee would have worsened the deficit in the trade

balance. •Devaluation thus became a defensive necessity and it

is in this sense that devaluation in India may be said to poa 'J.a a speciality of ita own and its olnice beasme a lbbson'l Clnite."

. Devaluation reduced the deficit .in India.' s trati'Et be.la.nce

from Rs. 283.8 orores in 1948-49 to Ps. 89.9 orores in 1.949-50.

In 1960-61, ~he deficit in the trade balance n.B only li. 3.5

orores.13 Iht price level in India was rising. Price .level

of all commodities rose from 395.6 in June 1950 to 467 .D in

April, 1961 ( lfule : August, 1939 = 100) .14 The outbreJ,k of

War in Korea on the 25th June, :1950 and the consequent ato ok­

piling programmes in all important countries, notably U.S.A.

was a major contributory factor to trla price ria~.

In order to check inflation, revaluation of the rupee was

suggested by Dr. John Mathai. He argued that taxation mas already been pushed to the point of diminiahing returns and

12. Reserve JSnk of India .&llletin, Novemier 1950, p. 776

13. •India' s zalanca of Payments 1948 .. 49 to 1961-62"' Published by the Reserve &nk of India. 1963, p. 21.

14. D. Bright Singh " Inflationary Price trends in India since 19 39 •. Asia. PUblishing lbtlSe, lbmbay 1961, p. 69.

savings on a voluntary be.sis are difficult to come by. Credit

control would not curb speculation. Under these ciroumstucea

revaluation, he .said, would check inflation and he suggeated

that the value of the Indian rupee soould be raised from 1 ·• 6 d.

to 1 s. 8 d. 16 lnt en Etpert Coamittee appointed by the Reaene . .

Bank of India to study the question of revaluation of the rupee

came to the conclusion that revaluation would significantly

reduce ou:r forei~ exchange earnings. According to the

Cbornittee, jl)~ revaluation would cause a deficit of li. 50 orores

and a 30% ~evaluation w.>uld involve a deficit in the balance of

trade of ~. 135 crores. It may be noted that rise in the price.

during 1950 and first part of 1951 was due to the Korean a.r Ibom and India was to a great extent only smring the experience

of other countries as well. From the second half of 1951 the

price level smwed a downward tendency. "From the maximum level

ot 457,6 in April, 1951 the Economic Adviser' 1 general indu

declined to 4~.3 in January, 1952 and came dom to 377 .c in

Kerch 1962 i.e. e. decline of 6.7 points a month. Over the year

1951-52 the general price level. smwed a decline of jj).9 percent

as egainst a rise of 15 percent during 1950-51•.16 lloreover,

as .nr. K.V. Gowda oba~rved, "Appreciation ot the rupee migtt

damp down the rising prices for a temporary period but the under

lying pressure will be there all the time. Appreciation 1LOUld do

15. Dr. John Mathai in Ta.te. Quarterly, July, 1961.

16. D. Bright Singh, op. cit., P• 63.

nothing to raise produoti vity without which inflation cennot be

oheoked•.17 A country cannot afford to apprecie,te its cntrrmcy

if it bas en inherently weak balance of pe.ymatta position. 'fhe

deficit in the trade balance, which was reduced to 3.6 ororta in

1950-51, soared up to il. 28) .a ororea in 1951-62. 18

DeYalue.t ion o t 1966 June

'l'he Indien rupee wae devalued for the aHOnd

time ainoe Indtpmdmee on the 6th June, 1966,

In terms of gold, the rupe' was deYe.lued to the extent of 5.5 per

cmt. The gold value or· the rupee came doWl trom 0.186621 grema to

0.118516 grams .• The u.s. dollar ·pecame equal toll. 7.50 in place

of the old rate o t J 1 = 4. 76. That is to say the exchange nlue

of rupee fell from 21 cents to 13.33 cents. One pcmnd aterli!ng

becmne equal to 11. 21 as against ~. 13.33 prior to deYalue.t:i.on or

t~ exchange rate of the rupee fell from 18 pmoe to 11.4. J•ce.

India bej now to pe.y 5'1.5 per oEilt- more in terms o t the Indian

rupee tor these currErtciee. U\4.

In a special broad cast on the night o t June O, .1966, tbm " * linence lliniater Sri Sachind.ra Omwdblry gave the following

e.rgummta in favour of devaluation : 19

Intemal pricea in In~a have been rising for aoae y n.

In 1966 the general price leYel waa 80 per cent roore then what

1 t WeJS 10 years ago. On the other bend, the o ftioial par Yalae o t

17. K. Venke.tegiri Gowda in "Appreciation of the Indian Blpee• Ohaitanya Publishing House, Alle.ba.bad 1961, P• 197.

18. •India' 1 Be.lsnce of Paymmte 1948-49 to 1961-62•,op. cl t., p. 18. 19. Rlblished in •,A n intell!gent citizen's guide to deYe.luation•

Go vemment o t Weat Bengal, Oba.pter I, pp. 1-4.

the rupee has remained unchanged since 1949. Prices havt not rieen

to anything like this extent in the main countries of tilt world

with wmm we trade and in oonaeauence our exports have been meeting

increasing resistance in foreign countriea. In order to overcome

price resistance to many of our exports in foreign markft.a, we

have been subsidising exports in several ways, by imporb entitle­

ment to exporters, by direct subsidies and by tax credit; certifi­

cates. 1bt these measQ.res have succeeded only to a limited extent

and they are suitable only to meet t,~porary difficulti•a· We have

resorted to devaluation a.s it is a more enduring and reliable y

of restoring and in~eed increasing the competitiveness of our

exports.

Secondly, devaluation would also quicken the paoe of

imp:>rt substitution. Jmduring encouragement to lx>th exports a.nd

import saving e.oti vi ties would enable India to Dlve fa.eter towarda

eelf-relienoe.

Thirdly, remittances into India would be encouraged and

remittances out of India would be discouraged. The foreign excblnge

blrden arising from repatriation of profits, capital and royalty

payments by private foreigrt investors would automatically go down.

On the other hand, new private investors wm bring fore ian exobulge

into the country will be able to realise more rupees and this · Juld

serve to encourage new foreign lnvestment in the fieldl where it

is desirable.

Fourthly, anti-social practices such as under-intoicing

of exports, over-invoicing of imports, sale of tra.vellera'

cheques in the unofficial markets, smuggling of gold and fther

articles would become less attraoti ve at the new rate and, there­

fore, less widespread.

The Finance Minister admitted that in terms of ruJees,the

lnrden of foreign debt repayment would gp up and that the rupee

cost of Government imports and other foreign expenditure• would

go up. !Ut export duties would yield substantial revenue and

the rupee value of foreign aid .:>uld go up. On OO.lance be •xpected

that devaluation would have no adverse effect on the rudgetary

position.

The Finance Minister announced that the Governmert would

take measures to prevent the rise. in prices of food greins,

fertilizers, kerosene oil and diesel oil as a oonaequence ef

devaluation. He also announced that articles like kerosene,

copra and raw cotton would be imported on an adequate scale to

increase the availability of essential consumer goods.

The decision to devalue the rupee was criticised en the

following grounds :

Success of devaluation reouires that the demand for

imports in India smuld be elastic and the demand for Indian goode

in foreign countries smuld also be elastic. lbt India waa

importing only essential goods. It would not be possible to reduce

imports further. Only their prices in India would inoree.se. On·

the other hand, the demand for the traditional items of exports

like jute products, cotton textile products, tea etc. is not

very elastic in foreign countries. Therefore exports would not

increase to a.n appreciable extent as a result of devaluation.

It was also pointed out that the benefits of devaluation

could be achieved. (a) if the mme demand for ~portable goode

could be restrained (b) if produ9tiQn could be increased to

meet t.he increased demsnd for export, _end (c) if local costs and

prices did not rise as a result of devaluation. It was feared

that the aoove conditions might not be fulfilled.

Devaluation was eaid to have been forced upon India by

U.s .A. the \\brld Bank and I .K.F. as a condition for resumption of

aid which was suspended at the time of Indo-Pakistan conflict of

1965.

Effects of devaluation upon the balance of trade cen be

assessed from the following figpres :

Table 1.~

India.' s Trade &lance (Rupees Oro res) Year (April-March) Imports ( c.i .f.) _ l'!%ports ( f .o. b) Trade

}alange

1966-66 1966-67 1967-68 1968-69

1350.0 1991.4 2055.7 1740.5

783.3 1086.6 1257.9 1167.4

- 666.7 - 905•8 -797 .a - 3'73.1

(Source : Reserve &.nk of India Bllletin, March 1970, p. 510, October 1972, P• 1828 and February 1977, p. ~ 1D8. 0

28

It will be seen that the deficit in the tJilaace of trade

became larger in 1966~67. lht this was partly on e.oeount of high

food imports in that year { R\. 651 oro res). The tre.dt deficit '18.1

lower at !$. 797.8 crorea in 1967-68. lbt there was a marked impro­

VEment in 1968-69 when the balance of trade deficit ftS narrowecl

down to Rl. 373.1 crores. This was_due to an a.ppreoi,able reduction

in imports and increase in exports. Imports fell by aoout 15 per

cent and export increased by 19 ·per cent. 20

Prof. Jagdisb Bhagwati. has defended the deoiaion to devalue

the rupee. 21 He axgues that while the de jure grosa devaluation

was 57.6 per cent, the de facto net detaluation, allowing for the

simultaneous ranoval of export incenti vee Md the reduotion of

duties, was only 21.6 per cent for exports. Also, deYalua.tion . s

followed soon by a second agricultural drought of major dimen­

sions which raised the price level and lowered the exports of

agricultural and agriculture- tued products. As for tre.di tiona.l

industrial exports, devaluation had been neutralised by the levy

of offsetting export duties. lht non-traditional ex]M)rts, like the

export of engineering goods, iron and steel and chemicals, fared

better due to devaluation. Exports of these items increased from

g 53.9 million end .6 71.6 million in 1964-65 and 19io-66 res­

pectively to Z 76.8 million and Z 128.7 million in 1966-67 and

1967-68 respectively. Aid utilisation also would have been much

less if the rupee had not been devalued in 1966.

20. Government of India., Economic Survey 1969-70, pp. 42-43. 21. J~dish ~ti in "The ExohanP:e Bate Policy • II.

The June 1906 devaluation". Statesman, Calcutta dated Kay 5, 1972.

•Thus the June 1966 policy changes were not reaponai ble for

the unfortunate developments in the behaviour Of O'ftrall exporta

and the price level that have been assigned to them by uncritical

observers. Their effect on export performance, on production leyel,

on investment and on aid utilization was generally benefioial.They . . .

reduced the level of reliance on inefficient export; eubsidiea aritt tms reduced the well-documented harm that these me~b>ds of expor1;

promotion e.s against sui table excl:rulge rate changes, were inflicting

on the country until June, 1966.,22

Devalue.tion of the British Pound in Nov., 1967

On Noveutber 19, 1967, Britain devalued the Pound

Sterling by 14.29 per cent. In 1949, moet of the

rest of the world had followed Britain and he.d

devalued their currencies along with Britain. lbt this time tmugh

14 other I .M.F. members followed Britain within 10 days, even many

of the major sterling ares countries including Australia, South

Africa, India and Pakistan did not follow sterling aownward. As a

result of the devaluation of the Pound sterling Re. 1 became equal

to 13.3 pence in place of 11,4 pence and 1 pound sterling became

equal to ~. 18 in place of ~. 21.

International monetary crisis since 1971

Since tne middle of August 1971, the International

monetary system is passing through a number of

crises of varying intensity and the Bretton \\bods

system of adjustable peg llaa collapsed. The U.s.A. experi.enced

22. Jegdish Bhagwati, op- cit., para 16.

continuous end gradually heavier l:8lanae of payment• defioite

since 1958. Her gold reserve was dwindling rapidly. On 16th

August, 1971, Richard Nixon, the then President of the U.s.A.

anndunced the suspension of' convertibility of u.s. della.r into

g>ld. The Government of India announaed23 tmt the gold nlue

of the rupee would be maintained end .the parity between the rupee

and u.s. dollar at· the rate of Re. 7.50 = 1 u.s. dollar would also

be maintained. lbt the rupee - sterling rate would yary, depending

on the dollar-sterling rate in the lDndon market.

When the U.S. do lla.r became inoonYerti ble into gold, major

ourreneie~ of the world began to f'loe.t. lbt this state of un­

certainty, accompanied ~ wide fluctuations and excessive speoulatio~

was adversely affecting world trade and payments. In order to find

Smithsonian Agreement

a way out of this impasse, the rioheat countries

of the world reached an agreanent on December 18,

1971. This agreement is known as the Smithsonian AgreEIItent. Under

the terms of this agreement, the U.s. dollar was devalued by 8.67

per cent. P.er values of some other major currencies were

revised upwards and the band of fluctuation was widened upto 2.25

per cent on either side of the new rates as against the bend of

1 per cent on either side of parity permitted under I .ll.F. rules.

The Government of India decided on Deaanber 20, 1971 to

de link the rupee from the dollar and to adopt a. central rate for

23. statesman, Calcutta dated 23.8. 71.

31

sterling equivalent to the average of tuying and selling rate.l of

poijnd sterling OO.Sed on the .closing IDndon quotation for dolltz

on December 17, 1971. This central rate was fixed at one ptllld

= "Ps. 18.9677.

The Smithsonian attempt to revive the Bret•n

\\bods system of fixed rut a.djuetable parity Floating of the British pound

did not survive long. Adverse balance of ptymente

and speculative pressures and the resultant depletion.of res~Tes

led to the floating of the British pound from June 23, 1972.)lt

the central rate of exchange between the pound sterling and the

rupee was kept unchanged.

Second de­valuation of the dollar

Even after the Smi th8onian AgreEment of Deeember

18, 1971 the U.s. balance of payments poeition

continued to deteriorate and the U.s. dollar was

devalued a second time on 12.2.73 by 10 per cent. After a meeting

of the Cabinet' a Economic Policy Coomittee, the Government of India

announced on '16th February, 1973 that the parity of the rupee with

the pound at ~-. 18.96 fixed in December 1971 would be maintained.

Maintenance of the rupee­sterling link

Maintenance of the rupee-sterling link W8.8

favoured because many developing countriea

maintained a fixed exchange rate in tenne et a

major intervention currency .. On account of e. long tradition of the

association of the rupee with the pound sterling, India cme·e pound

sterling as an intervention currency .. It was administratively simple

a.s it avoided the need of continuous decision-making which ia

S2

required in the case of managed floating. As ab>ut '!IJ per cent

of India's foreign trade is denominated in pound sterling, a

stable rupee-sterling ratio would eliminate uncertainties.

So long as the pound sterling ranained reasonably stable,

the rupea.sterling link might have been advantageous for India.

B.lt the pound was continuously slumping and with it the rupee

floated downward resulting in the depreciation of the rupee in

tenns of other major currencies. For example, between December

1971 and September 1976, the Indian rupee depreciated by 33 per

cent in terms of the Deutsche Mark.

It may be argued that the depreciation of the rupu in terms

of other major currencies would most our exports. lbt aa the

elasticity of demand for most of our traditional exports in the

foreign markets is low, there was no marked improvement in our

exports. On the other band, the costs of importing fertilizer,

petroleum and plant and machinery were rising. As a result, in

each of the three years since June 1972 when pound floated, the

proportionate rise in the rupee value of imports has exceeded

the proportionate rise in the rupee value of exports. Apart from

this •Two additional factors now increasingly loom large, further

clouding the picture. As the recent controversy over the rupee­

rouble exchange rate has indicated, with each depreoiatien of the

Indian currency following the depreciation of the pound aterling,

the East llropean Governments expect the notional ratea of

exchange of the rupee vis-a-vis their currencies to be reviaed

and the details of the trade plans signed with them be altered

accordingly. The effect of this could be to force a larger

quantum of Indian goods than before to be exohange4 tor a g1 ven

bmdle of East JW.ropea.n goods. In the second plact, with the

esteep decline in the value of pound sterling vis-a•tis the other

western currencies, India's repayment burden to coantriee such

as the United· States, Canada, West Germany, France and Jape.n -.ould

also mount way beyond the earlier calculations •• 24

Dle to the steep rise in the price of petroleum and the

domestic rate of inflation, there has been a continuous deterio­

ration in Britain's te.la.nce of payments and the exchange value

of sterling went down by 28.5 per cent from the time of th8

Smithsonian Agreement of December 1971 upto 23-rd September, 1975.

])le to the link of the rupee with sterling there waa a disguised

devaluation ·of the rupee by that amount. As already explained,

this devaluation of the rupee by :the OO.ok door was going agai.Mt

the interest of India.

I» linking the rupee from sterling

The Government of India. took these :factors into

consideration and snapped the rupee-sterling

link on the 24th Sept~mber, 1975.

It was announced tha.t the exchange value of the rupee would

henceforth be determined with reference to a OO.sket of selected

currencies of countries which are India's major trading partners.

lht it was stated in a Press Note that the pound sterling would

24. "Economic and Political Weekly•, June 21 & 28, 1.976 1st Editorial.

continue to be used by the Reserve Bank ot India aa ita currency

of intervention. This meant that the daily exchange rate worked

out in relation to the exchange rates of the blsket of currencies

would be expressed in terms of the pound eterling.

Altoougb the oontents of the t&sket have not been die­

closed, it is conm>n knowledge that the key. currencies that

enter into India's trade a~e pound sterling, Deutsche lark,

the Japanese Yen and the U.s. dollar. The Russian Roultle

is also a major currency, l:ut the fixation of the exchange rate

between the rupee end the Rouble is another matter.

Now the situation is. that whereas upto 23.9. 75 the rupee

was floating with the pound, it. has been floating with the

basket of currencies since 24.9 .75.

With effect from the 25th September, 1975 the Reaerve

&nk of India's spot blying end selling rates for pound

sterling was fixed at the middle rate of R3. 18.Z084 for the

pound as against the middle rate of ~. 18.60 for the pound

prevailing upto 24.9. 75. This means that the rupee has been

revalued slightly on the first day of ending the link with the

sterling. J\lture changes in the rate - now to be expressed

daily - would be determined with reference to the b:Lskot of

currencies.

The Government Press Note said that after reviewing the

recent developnenta - which obviously means the rapid depreciation

of the sterling end the strengthening Qf _tho U • 8-.do llar - the

•Government has concluded that in the altered oiroumstenoes, it ia

necessary to mve over iurnediately to a new arrangement which

on balance, may be expected to impart a greater measure of

stability to our exc~e rate and in consequence to our inter­

national transactions". 25

Since the delinking of the rupee from too pound sterling

the rupee has been upvalued 8 times and devalued 2 times in

terms of pound sterli11g upto 24th May, 1978. While the rate

of exchange was ~. 18.30 to a pound on t}:le 25th September, ·

1975, in .the sixth revision on April 29 1 1976 the parity rate

beaame Ps. 16 to e. pound which means a. 13 per cent upvaluation

of the rupee in eight months.

"On the 24th May, 1978 the Reserve Bank announced that the

rupee YJOuld be upvalued against the pound by 2.5 per cent. The ' .

Reserve lhnk wou+ci bly pound at the rate of Rs. 15.40 and sell

at the rate of Rs. 15.00 per p>und.

Since then the continuous and rapid deoline of

the dollar in the world currency market led to ]))cline of the dollar in the world currency market . the downward .revision of the rupee five times

upto ~b October, 1978. The middle rate of the rupee was fixed

at te. 16.35 for· a pound on 30.10.78 which meant that the rupee we.a·

devalued b,y nearly 8 par cent since May, j978.

26. Statesman, Calcutta, dated 25.9. 75.

}(eastlres to stre~hen the dOllar

On 1st November, 1978 President Carter

announced strong measures to check the

decline of the dollar. The u.s.A. would

draw .s 2 billion in n .. ll. end Yen from its reeene \ranohe with

the I.M.F. and another Z 1 billion soortly thereaf\er. u.s.A. wollld sell tJ 2 billion S.D. Rs., increase her •awa.p• linea

with the central tanks of West Germany, Japan end Switzerland

from a total of 8 7.4 billion to Z 15 billion, and issue upto

! 10 billion of her own securities in foreign countries. 26

Aftel' the announcements Qf these measures for etrengt,hen­

ing the u.s. dollar, _the dollar, whioh had declined in value by

18% in the past year, stopped sliding and began to recover

slowly~

Strengthening of the cbllar imparted some strength to

the Indian rupee and as a result the rupee was revalued against

the pound sterling by 1.24 per cent on the iath November, i978

after five successive devaluations in the period between May and

October, 1978. The Reserve Bank of India ennounoed on the 18th

November, 1978 that .the new purcwe and sale rate for spot

deli very 10uld be ~ •. 16.10 and ~. 16.20 respect! velyyielding a.

middle rs.te of R3. 16.15 per pound·.

From the study of the chequered career of the external

value of the Indian rupee, it will be evident tbtt during the

26. DIF Survey, November 6, 1976, pp. 3'$'/, 348.

British period the rupee was kept overvalued to facilitate the

payment of lbme Oharges and used as a. metmd of t~Jation,.

Illring the Second1• \Jbrld War, there was a. huge expansion ef Indian

currency based on the sterling reserves which led to ser'ioue

inflation and consequent hardship to the people of Indi&,. When

India became a mEmber of the I .u:.F. the ra.te of exchange. betwem

the rupee ~d the pound sterling at rupee one.= 1 s. 6 d .• wae

maintained. The devaluation of the pound in 1949 was followed

by India and the rate of exchange between the pound a.nd the rupee

rane.ined unaltered after the deva.lu$-tion. Even during the period

of Decanber 1971 to . 23rd September, 1975 .. the time betWten the ·

Smithsonian Agreement and the delinking of the rupee fros

sterling- the rupee-sterling ratio was kept uncmnged. Tbi8 led

to the depreciation of the rupee along with the pound sterling,

tmugh this was not in the best interest of India. After delinking

of the rupee from the pound sterling, the rupee began to appre­

ciate against the pound sterling upto May 1978. lht theree!ter

it began to slide as the dollar - one of the major currencies

in the basket of currencies according to which the exchange rate

of the rupee is fixed - began to slump Continuously.· After dollar

was strengthened by the policies announced by the u.s. President,

the rupee gained strength against the pound.

The floating of the Indian rupee is not independent lut it i•

a •eon trolled float •. The Reserve Bank of India has the respon­

sibility of determining the exchange value of the rupee.

It is not inmedia.tely clear whether this floating rate

system would be replaced by a new monetary arrangement. lbt it I

appears that it is likely to continue in the near future. So

long as this floating rate system continues, the Reserve Be.nk of

India 110uld have to manage it with the o bjeot of increaai.Rg our

foreign exohaQge earnings.