Tracking the long-term movement in the rupee, there have been many periods of rupee volatility linked to chaotic economic conditions.
The rupee was valued at 4.78 per US dollar in 1966 after continued trade deficits through the 1950s resulted in a situation where neither money from abroad nor the private sector was forthcoming. The situation came to a boil when foreign aid, a key factor that prevented devaluation of the rupee, was cut off unless India acquiesced to demand to liberalise trade.
Matters were complicated by the India-Pakistan War of 1965, which prompted the US and other countries allied with India’s neighbour to withhold aid. Another hindering factor was the drought of 1965-66, which resulted in a sharp rise in prices. India was finally left with no choice but to take the politically unpopular step of devaluation alongside liberalisation.
Exchange system
Subsequently, the rupee depreciated by over 50 per cent over the next five years to 7.56 per US dollar in 1970. In 1975, the year in which the rupee severed its connection with the British pound, the exchange rate was 8.39 per US dollar.
In the subsequent years, the rupee managed to appreciate marginally against the US dollar, but in the 1980s, a similar crisis situation arose that took a toll on the India currency. The rupee had a fixed exchange system at the time where the rupee was pegged to the value of a basket of currencies of major trading partners.
Forex reserves
In 1985, the first signs of trouble emerged when India was faced with a burgeoning trade deficit that it was hard-pressed to finance. The exchange rate was 12.36 per US dollar in 1985, but by 1990, it had fallen to 17.5 per dollar as the country’s trade imbalance continued.
In 1991, the situation was dire and India’s forex reserves had dried up to the point that the country could barely finance three weeks of imports. The situation mirrored 1966, with high inflation and large government budget deficits. And like 1966, the situation was ameliorated through liberalisation of the economy and devaluation of the rupee. By 1995, the rupee had fallen to 32.42 per US dollar and by 2000, it was 44.94 per US dollar.
Ups and downs
In the 2000 to 2007 period, the rupee has seen relative stability, hovering in the range of 44-48 per US dollar. In late 2007, it reached a 10-year high of 39 per US dollar on sustained foreign investment inflows. But the trend reversed abruptly in 2008 with the onset of the global economic crisis as foreign investors pulled out their funds rapidly. Since then, the rupee has seen record lows of 50.27 in October 2008, 52.04 in March 2009, 54.30 in December 2011 and 57.30 in June last year, prior to the latest decline to unprecedented levels.