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.