Disclaimer: Originally published in August 2018. It is being republished since it still remains a relevant and interesting topic till today.
The Indian rupee on Tuesday plunged to an all-time low of 70.08 against the US dollar before being closed at 69.90 per dollar at the end of the day, thanks to some much-needed intervention from the Reserve Bank of India (RBI).
The latest fall in the value of rupee was triggered by the crash in the value of Turkish lira, Turkey’s official currency. Fall in the value of Turkish lira led to a global currency crisis, and the currencies of emerging markets took a major hit.
If someone told you today that the rupee was once valued at 4 per dollar, you’d probably laugh on their face and I can’t really blame you for it. Considering how the rupee has fallen against the dollar in the past decade, it’s hard to believe the above-mentioned fact.
Turns out, it actually is true. When, you ask? 1948.
Yes, in 1948, you could have bought a dollar for 4 rupees. But since then, the value of rupee against the dollar has depreciated 21-fold or to express it in a percentage, by 2000%.
Now before moving on to how the rupee has fallen against the dollar over the years, let’s take a look at how the value of rupee is determined.
Determination Of Rupee’s Value
The value of a currency is linked with its economic conditions and policies. It depends on factors such as imports and exports, inflation, employment, interest rates and growth rate.
India is a hybrid economy, meaning it has a flexible exchange rate system but there is intervention from the Central Bank in times of dire need.
In a flexible exchange rate system, the exchange rate is determined by the market forces of demand and supply. If the supply of rupee in the international market is more than its demand, then its value reduces and vice versa.
If there is more demand for imported goods in a country it will simultaneously increase the demand for foreign currencies, this, in turn, can weaken the local currency.
India has typically been an importing nation than an exporting one, as a result of which, the rupee has fallen.
Let us now move on to how the rupee has fallen against the dollar over the years.
Falling Rupee Over The Years
When India became independent, its balance sheet was clean as a whistle with no pressure on part of foreign borrowings. But since India now had to develop as a nation, foreign borrowings were unavoidable.
When then Prime Minister Pandit Jawaharlal Nehru announced the first five-year plan in 1951, pressure on rupee grew. Also, since the rupee was directly linked with the British pound, as British pound devalued, so did the rupee.
The exchange rate remained stable for the next few years, although a budget deficit was apparent.
Indo-China war of 1962 led to a hike in military spending. The Indo-Pak war of 1965 followed it quickly, which put a major dent in the budget deficit.
India was also hit by twin droughts in 1965 and 1966. Thus, India was almost completely dependent on food aid from the US.
As a result, the value of the rupee fell sharply to 7.57 per dollar in 1966 – a drop of 58%, which was huge then.
Over the next two decades, the rupee depreciated slowly with time, as the trade deficit continued to increase.
Political instability in the country put pressure on the local currency. In 1985, the rupee fell to a new low of 12.92 per dollar.
With pressure on imports mounting, the rupee was depreciating each year by more than a rupee per dollar.
The Gulf War of 1990 triggered a surge in oil prices around the world. In addition, India’s Sovereign (SOV) Credit Rating was downgraded in the same year.
By the end of 1991, the rupee plunged to a new low of 26.41 per dollar.
In 1993, India switched to a flexible exchange rate system, which meant it allowed the value of the rupee to be determined by the market forces freely. As a result, the rupee breached the 30 mark.
The rupee continued to depreciate over the next decade and touched 48 per dollar by the start of the 2000s.
The rupee gained some ground in the coming years, with the stock markets performing well and FDI flowing into the country.
The world was hit by the global economic crisis in 2008. Thus, there was no stopping the rupee from depreciating further. It passed the 50 mark in 2008 and by 2012, it breached the 60 mark as well. Yesterday in 2018, the rupee finally touched the 70 per dollar.
Impact of the Fall
Importers are the worst affected by a plunge in the value of the rupee. They have to shell out more rupees to buy a dollar. Thus, importers like oil companies have to raise their prices to recover the loss.
Exporters, on the other hand, benefit from the depreciating value of rupee as they get more Indian rupees per dollar while converting their foreign earnings into local currency.
Should we be concerned?
A foreign exchange analyst was quoted by the Indian Express, “If global currencies show further meltdown, the rupee will also fall further. It could touch 75 in the next 4 or 5 months”.
The RBI continues to state that the fall in currency isn’t a major concern as long as other currencies fall too, as it puts everyone on the same ground. The current fall is caused more by external factors than internal ones.
Thus, we can remain calm for now while the global economies struggle to recover from the latest crisis.
Image Credits: Google Images
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