The US Dollar is the most commonly held currency in the world today holding over 60% of global foreign reserves. All the countries across the globe, including India, measure their currency values against USD in the global market. The fluctuating value of any currency against USD 1 is called the exchange rate.
Global trade is possible because of the existence of exchange rates and it is an important determinant of any country’s economic prowess.
Value Before Independence
INR Journey Post Independence
Value Before Independence
It has been 75 years since India became a free country. Since then, the country’s currency has been on a roller-coaster ride against the US dollar. There have been various reasons for the largely downward trajectory of the INR’s journey including economic reforms, geopolitical issues, and even international issues. Currently, the Indian Rupee’s value against USD 1 is approximately INR 82.
It all began with the Bretton Woods Agreement in 1944 which required each country to measure its currency against the US Dollar. The dollar itself was convertible to gold at the rate of USD 35 per ounce. Being a part of this agreement, India followed the par value system of relative exchange rates. As the country was under British rule, INR value was derived from the British pound which was GBP 1 equaled INR 13. Similarly, GBP 1 equaled USD 2.73, which roughly translated to USD 1 equalling INR 4.76.
INR Journey Post Independence
The journey of the Indian Rupee against the US Dollar can be mapped in different phases since India won independence.
Phase I – From Independence to the 1960s
India gained independence from British rule on 15th August 1947. It was a time of great turmoil as the country’s economy was in shambles. In a bid to jump-start the economy, the first prime minister, Jawaharlal Nehru adopted the five-year plans from Russia and began consistent loan borrowing in the 1950s which substantially increased in the 1960s.
However, even with increased borrowing, the country’s economy was facing a budget deficit which was further aggravated by the two wars in the decade. The first was the Indo-China war of 1962 and the second was the Indo-Pak war of 1965. Then struck the natural disaster of drought in 1965-1966. All of these added to increased spending on defense which reached a high of 24.06% of the total government expenditure.
Also, by 1966, the Indian Rupee finally moved away from the rate comparison of GBP 1 equalling INR 13 to a direct comparison with the US Dollar. All the economic upheaval of the previous years led the then Prime Minister to devalue the Indian Rupee to INR 7.50 against USD 1, which till then, had held a constant value of INR 4.76 against USD 1. This devaluation, in return, led to cheaper exports and expensive imports resulting in sharp inflation.
Phase II – Reduced Oil Production by OAPEC – The 1970s Decade
This was a decade of two major changes. First, the Bretton Woods Agreement collapsed in 1971, which meant India adopted the fixed rate system, linking its currency exchange rate to the UK Pound Sterling. A couple of years later, in 1973, the Organisation of Arab Petroleum Exporting Countries (OAPEC) decided to reduce oil production. By 1974, the INR value further deteriorated to INR 8.10 against USD 1 in reaction to the oil crisis. In a bid to ensure stability and to its currency and to ensure that the increasing disadvantages of associating with a single currency were curbed, the Indian Rupee was pegged to various other currencies as well.
Phase III – The 1980s and 1990s
The two decades of the 1980s and 1990s were politically unstable for India. The assassination of Prime Minister, Indira Gandhi, in 1984 reduced foreign investor confidence in the economy. A few years later, in 1991, the Soviet Union collapsed, which was, till then, a crucial trade partner of India. This led to a sudden and large export fall. The Persian Gulf nations had doubled crude oil prices just a year prior leading to India facing a serious balance of payment crisis. The fiscal deficit of the country decreased to 7.8% of the GDP and the interest payment rose a whopping 39% of the total government’s revenue. Furthermore, the WPI inflation within the country was around 14%. The country was on the brink of bankruptcy and had no choice but to further borrow money from IMF (International Monetary Fund) against its gold reserves.
This severe economic crisis of 1991 was dealt with by the then government by further devaluing the Indian Rupee and by 1992 the exchange rate of USD 1 was INR 25.92.
Phase IV – The 21st Century
The Indian Rupee’s decline continued into the new century and by 2002 it was valued at INR 48.99 against USD 1. However, this also proved to be a turning point in the country’s economy as Foreign Direct Investment (FDIs) increased within India and sustained till 2007 when the Indian Rupee appreciated reaching INR 39.27 against USD 1.
Unfortunately, the global financial market collapsed in 2008 ending the upward trend of the Indian Rupee and by 2009 it fell to a record of INR 51.75 against USD 1. Contributing global and domestic factors saw the INR further fall to 56.57 against USD 1 by early 2013.
Three years later, in an effort to combat corruption and black money within the economy, the Indian government announced demonetization which discontinued Rs. 500 and Rs. 1000 notes with immediate effect. This led to almost 86% of the country’s currency being invalid adversely impacting consumption patterns, investment, and income. It was also a major push to a new digital India, thereby increasing cashless transactions. However, in 2016, the value of the Indian Rupee further decreased to INR 68.77 against USD 1.
Last but not least, was the global economic crises that followed in the wake of the coronavirus pandemic of 2020 and the ongoing war between Russia and Ukraine. Currently, the exchange rate of the Indian Rupee against the US Dollar is approximately INR 82.7.
The journey of the Indian currency against the US dollar is also a testament to the economic journey of the country since independence. Being one of the fastest-growing economies today and also one of the top 5 in the world, India is in a strong position of recovery. It will be interesting to watch how the Indian currency fares against the US dollar in the coming days.
What factors affect the exchange rate between the Indian rupee and the US dollar?
Several factors can affect the exchange rate between the Indian rupee and the US dollar, including:
- Interest rates
- Economic performance
- Political stability
- Trade balance
- Capital flows
- Monetary policies
How has the exchange rate between the Indian rupee and the US dollar changed over time?
The exchange rate between the Indian rupee and the US dollar has varied over time due to economic and political factors. The rupee has appreciated and depreciated against the dollar at different times, influenced by global economic conditions, monetary policies, and geopolitical events.
How do changes in oil prices affect the exchange rate between the Indian rupee and the US dollar?
Oil price changes impact India's import bill and can affect the exchange rate between the Indian rupee and the US dollar. Higher oil prices lead to a higher import bill, putting pressure on the rupee, while lower oil prices can support the value of the rupee.
What is the role of the Reserve Bank of India in managing the exchange rate between the Indian rupee and the US dollar?
The RBI manages the exchange rate by intervening in the foreign exchange market, using monetary policy tools, and managing India's foreign exchange reserves.