A brief history of the rupee

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A brief history of the rupee

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• 1931 onwards: Indian rupee was on a British sterling standard since 1931. So as sterling depreciated, the rupee did too. The rupee was fully convertible against any other currency.
• Second World War and exchange controls: As Britain declared war on Germany in 1939, India was prepared for it through exchange control – rupee was now made inconvertible.
• What did that mean? Britain needed dollars for the war. (a) Now, transferring money outside the “sterling area” needed permissions. The govt. acquired all dollar securities owned by individuals, and converted them into rupees, paid later. (b) Bank of England sold those securities, earning dollars. Indian silver bullion was also sold to other governments (outside sterling area) to raise dollars.
• War inflation in India: First, only essential consumables were allowed for imports, and not capital goods. India’s sterling balance became 1300 million pounds by end of WW II. Import controls made this sum possible. Correspondingly, rupee circulation grew. So inflation happened!
• What was this 1300 million pound balance? It was India’s earnings in forex for war exports, and credited to the RBI’s account (deposited in BoE in sterling).
• Post war negotiations: Churchill once threatened to write off the balances! He went out of power. New government wanted a scaling down of the balances, and India sought assurances that sterling (over-valued then) won’t be devalued. Britain refused (it considered sterling to be the standard).
• Second round of negotiations: The June 30, 1948 date of independence was advanced to 15 August 1947, and chaos reigned. Second round was in London, in July 1947. After 15-August, both India and Pak would have only the sterling balances for imports payments! Write-off was ruled out, and limits were placed on sterling use so that the British economy may not suffer.
• Agreement: India could spend in dollars as Britain made the sterling convertible. But Britain cancelled it soon, due to poor condition of British economy (it needed consumer imports from US, and hence dollars). A pound convertibility would have exhausted its reserves. Final negotiations concluded in June 1949.
• Pound devaluation: The British had given a hint about devaluation. Finally, Attlee informed Nehru in Sept. 1949 that a pound is being devalued from $4.03 to $2.8. One third of India’s sterling balances eroded! India then devalued the rupee from Rs.3.309 to a dollar to Rs.4.762. Indian rupee and sterling were delinked in 1975.
• Summary : The second world war and the partition saw a final settlement of Indian foreign exchange in pound sterling, and consequent devaluation.

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