The Rupee History

The Indian rupee, which was at par with the American currency at the time of independence in 1947, hit a record low of 63.30 against a dollar Monday. This means the Indian currency has depreciated by more than 63 times against the greenback in the past 66 years.

Managing volatility in the currency markets has become a big challenge for the economic policy makers in the country. The central bank as well as the government has taken a series of measures to curb the volatility in the markets.

The Indian currency has witnessed a roller-coaster journey since independence. Many geopolitical and economic developments have affected its movement in the last 66 years. Here is a broader look at the Indian rupee's journey since 1947:

·         1947 – Indian Rupee was at par with American dollar. No foreign borrowings on the India’s balance sheet.

·         1951 – Devaluation of money as a result of external borrowing for welfare and developmental activities.

·         1948-1966 – Fixed rate currency regime. Rupee pegged at 4.79 against dollar.

·         1962 and 1965 – Wars with China and Pakistan respectively impacted the deficit adversely. Rupee devalued to 7.57 against 1 dollar.

·         1971 – Rupee’s link with British currency broken.

·         1975 – The rupee linked to US dollar, Japanese yen and German mark. Rupee valued at 8.39 against the dollar.

·         1985 – Rupee further devalued to 12 against a dollar.

·         1991 – Balance of payment crisis. The foreign reserves were not even worth to meet three weeks of imports. The currency was devalued to 17.90 against a dollar.

·         1993 – The currency was let free to flow with the market sentiments. The exchange rate was freed to be determined by the market. One was required to pay Rs.31.37 to get a dollar.

·         2000-2010 – The rupee traded in the range of 40-50 against the dollar.

The Indian currency hit a record low of 63.30 against a dollar Monday, surpassing its previous record low of 62.03 hit on Aug 16.

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Our India, Our Finance, Our Deficit

A large fiscal deficit is an indication that the economy is in trouble and will have reasons to worry. A high fiscal deficit, amongst many, could pose an 

• inflation risk
• minimize the growth of the economy
• doubt the government’s abilities
• it could affect the country’s sovereign rating, which in turn will limit foreign investors from looking at India as one of the investment hubs.

It is believed that high fiscal deficit can be corrected. For example, if the government could not control its expenditures, it could raise taxes to cover up for the extra amount of money spent. When taxes increase, consumers will involuntarily have to cut down on their expenditure to pay the government.
Also, the government expenditure puts pressure on interest rates creating a negative impact on savings. And yes, the Indian government can choose to import money into the country to balance the soaring fiscal deficit, but this move could appreciate the country’s currency and the government will have to pay interest on its borrowings, eventually increasing the deficit and affect the country’s economic growth. Therefore, delay in adjusting high fiscal deficit shows that the government cannot control its finances properly.
Did you know that several government projects are stalled because of high fiscal deficit? Here’s why. When a country labors under high fiscal deficit, it limits the government’s spending capacity and this has an effect on the continuous funds various projects need. Infrastructure projects, or welfare policies, or education and healthcare projects, for example.
The trouble with high fiscal deficit is that it leads to higher interest rates, disturbing the entire economy. Since the government is not earning much, it will have to restrict its expenses, unless it chooses to borrow. And since the government abilities are doubted idue to its incapacity to control its profligacy, it is very difficult for the government to access loans. And even if it gets loans, they are at given at high interest rates. On the one hand, the government borrows because it does not have enough money, and on the other hand, it has to pay more for borrowing money. Hence, fiscal deficit leads to a slow progress of the nation and slow progress of its people.

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