The document discusses India's exchange rate policies and crises since independence in 1947. It summarizes that India faced major financial crises and rupee devaluations in 1966 and 1991. In 1966, a war with Pakistan, drought, and reduced foreign aid necessitated devaluation despite trade restrictions. In 1991, high inflation, inconsistent trade deficits, and inadequate export incentives caused a crisis that led to economic liberalization. Foreign exchange reserves grew steadily from 2006-2012 except for a decline in 2008-2009 during the global financial crisis.

1. PRESENTATION
ON

3. We would like to express my special thanks of gratitude to my Prof. Prasad Kshirsagar Sir, who
gave us golden opportunity to do this wonderful project on the topic “RUPEE DEPRECIATION”.
While studying this project we gained lot of knowledge and information.
Secondly we would also like to thank to our friends who helped to finish this project within the
limited time. We have made this project not only for marks but also to increase our knowledge.
Thank you one and all.

4. ROLL NO
CANDIDATE NAME
TOPIC NAME:
RUPEE DEPRECIATION
SLIDE NO
100
PRIYANKA DABHOLKAR
Introduction,Reason to worry about the rupee depreciation
2&3
99
RAGHAV GUPTA
Foreign exchange instrument
4&5
134
SUNEET S. HEREKAR
What is rupee appreciation & depreciation, Forex market role
6 TO 8
138
PRATIK S. AWASARE
Inflow foreign assistance : gross & net (milion dollar equivalent)
1966, Two additional factors played a role in the 1966
devaluation, Summary of changes in foreign exchange 198692, What went wrong in-1991, Summary of changes in foreign
exchange 2006-12, Conclusion
9 TO19
110
POOJA.S.PAWAR
Statistical representation of rupee decline,
Historical indian rupee rate
20 & 21
134
OMKAR PIWALKAR
CHRONOLOGY OF INDIA’S EXCHANGE RATE POLICIES
22 T0 24

5. Flow Of Presentation
 INTRODUCTION
 REASON TO WORRY ABOUT THE RUPEE DEPRECIATION
 FOREIGN EXCHANGE INSTRUMENT
 WHAT IS RUPEE APPRECIATION & DEPRECIATION?
 FOREX MARKET ROLE
 INFLOW FOREIGN ASSISTANCE : GROSS & NET (MILION DOLLAR EQUIVALENT) 1966
 TWO ADDITIONAL FACTORS PLAYED A ROLE IN THE 1966 DEVALUATION
 SUMMARY OF CHANGES IN FOREIGN EXCHANGE 1986-92
 WHAT WENT WRONG IN-1991
 SUMMARY OF CHANGES IN FOREIGN EXCHANGE 2006-12
 CONCLUSION
 STATISTICAL REPRESENTATION OF RUPEE DECLINE
 HISTORICAL INDIAN RUPEE RATE
 CHRONOLOGY OF INDIA’S EXCHANGE RATE POLICIES
1

6. Since India’s Independence in
1947, India has faced two major
financial crises and two
consequent devaluations of the
rupee. These crises were in
1966 and 1991
2

7. 3

8. FOREIGN EXCHANGE INSTRUMENT
• FX volume surveys report turnover by instrument.
Instrument types include the following:
• Spot transactions are single outright transactions
that involve the exchange of two currencies at a rate
agreed to on the date of the contract for value or
delivery within typically two business days. Outright
forwards involve the exchange of two currencies at a
rate agreed to on the date of the contract for value
or delivery at some time in the future. This category
also includes forward foreign exchange agreement
(FXA) transactions, non-deliverable forwards (NDFs)
and other forward contracts for differences.
4

9. Continue…
• Currency swaps involve the exchange of fixed or floating interest payments in
two different currencies over the lifetime of the contract. Equal principal based
on the initial spot rate is typically exchanged at the beginning and close of the
contract.
• Currency or foreign exchange options are contracts that give the right to buy or
sell a currency with another currency at a specified exchange rate during or at
the end of a specified time period.
• Foreign exchange swaps involve the exchange of two currencies on a specific
date at a rate agreed to at the time of the conclusion of the contract, and a
reverse exchange of the same two currencies on a future date at a rate agreed
to at the time of the contract. For measurement purposes, only the long leg of
the swap is reported, so that each transaction is recorded only once.
5

10. What is rupee appreciation & depreciation?
 Exchange rate is the price of foreign currency (USD, Yen, Euro, Pound etc) in
terms of domestic currency (rupee) i.e. amount of domestic currency needed to
buy one unit of foreign currency.
 Currently price of 1$ = ` 53.74’, which means 1$ can be purchased in exchange
of `54’
 Exchange rate tells us the value of domestic currency in relation to one unit of
foreign currency. 1$ is worth `53.74’.
 Rupee prices keep fluctuating all the time. Sometimes we need more rupees to
buy one unit of foreign currency and sometimes we need fewer rupees to buy
one unit of foreign currency.
 This change in rupee price is known as rupee appreciation or depreciation.
 Rupee appreciation is when value of rupee increases (becomes expensive) and
fewer rupees can buy one unit of foreign currency. This is also known as
strengthening of rupee as now INR is worth more than foreign currency.
6

11. Continue..
 Rupee depreciation is when rupee value decreases (becomes less expensive) and
more rupees can buy one unit of foreign currency. This is also known as weakening of
rupee as now INR worth is less than foreign currency.
 If exchange rate changes to 1$ = `55’, we say rupee has depreciated as 1$ can buy
more INR.
 Currency price is always stated in relation to another currency. So when one currency
appreciates the other currency depreciates.
 Suppose exchange rate changes to 1$ = `50’, we say rupee has appreciated as 1$ can
buy fewer INR.
 Capital account flows- Current account deficit is funded by capital flows and current
account surplus generate capital outflows (invest in other countries). When there is
capital inflows in the country, demand for the currency increases leading to currency
appreciation. Capital outflow causes the country’s currency to depreciate as supply of
its currency decreases and demand for foreign currency increases
7

12. FOREX MARKET ROLE
• The FX market is one of the most important financial markets in the
world. It facilitates trade, investments and risk-sharing across borders.
• While good and timely data are available on prices of FX instruments, the
same is not true for trading activity.
• The authoritative source on turnover (the Triennial) scores high on quality
but gets lower marks for timeliness. In this article, I show how it is
possible to leverage alternative sources on FX activity to obtain a timelier
grasp of turnover developments.
• I produce a time series that, despite some caveats, is comparable to the
headline number from the Triennial.
• The results show that FX activity continued to grow during the first year
of the financial crisis but experienced a sharp drop after the Lehman
bankruptcy, from which it recovered only slowly. Moreover, I find that
trading activity was about $4.7 trillion per day in October 2011.
8

13. INFLOW FOREIGN ASSISTANCE : GROSS & NET (MILION
DOLLAR EQUIVALENT) 1966
ITEM
PL 480/665
185
WHEAT GRANT &
SPECIAL FOOD
ASSISTANCE
TOTAL
7
258
389
458
502
1792
480
414
196
112
1
8
16
32
93
61
52
19
192
258
390
466
518
1824
573
475
248
131
AMORTISATION
PAYMENT
145
105
124
147
124
645
184
283
104
138
INTEREST
PAYMENTS
69
81
100
107
139
496
135
161
82
79
TOTAL DEBT
SERVICING
214
186
224
254
263
1141
319
444
186
217
NET AID FLOW
497
747
1015
1266
1359
4884
1187
1142
574
415
NET AID FLOW
EXCLUSIVE OF FOOD
305
489
625
800
841
3060
614
667
326
284
9

14. Two additional factors played a role in the
1966 devaluation
• The first was India’s war with Pakistan in late 1965. The US and
other countries friendly towards Pakistan, withdrew foreign aid to
India, which further necessitated devaluation.
• In addition, the large amount of deficit spending required by any
war effort also accelerated inflation and led to a further disparity
between Indian and international prices.
• Defense spending in 1965/1966 was 24.06% of total
expenditure, the highest it has been in the period from 1965 to
1989 .
• The second factor is the drought of 1965/1966. The sharp rise in
prices in this period, which led to devaluation, is often blamed on
the drought, but in 1964/1965 there was a record harvest and
still, prices rose by 10% . The economic effects of the drought
should not be understated, but the data show that the drought
was a catalyst for, rather than a direct cause of, devaluation
10

15. Continue…
• India’s system of severe restrictions on international trade
began in 1957 when the government experienced a balance
of payments crisis.
• This crisis was caused by a current account deficit of over Rs
290 crores which necessitated India lowering its foreign
exchange reserves (RBI Bulletin, July 1957, pp 638).
• The large current account deficit was largely a result of the
Second Five-Year Plan which mandated higher imports,
especially of capital goods.
• Exports in the year 1956-1957 stagnated while imports
increased by Rs 325 crores from the previous year.
• Another factor behind the current account deficit was the
increase in freight costs due to hostilities in West Asia
11

16. Continue…
• Periodically, when import prices reached a premium, the
government would impose import tariffs in order to
absorb the gains accruing to foreign exporters as a result
of India’s import quotas.
• The second step the government took away from free
trade came in 1962 when India began to subsidise exports
in an effort to further narrow its consistent current
account deficit.
• As import prices rose, the government began to impose
tariffs to increase its revenue. Ultimately, in July 1966
India was forced by economic necessity to devalue the
rupee and attempt to liberalize the economy to attract
foreign aid.
• The drought of 1965/1966 harmed reform efforts as
feeding those in drought-affected areas took political
precedence over liberalizing the economy
12

17. Continue….
•
•
•
•
•
13
According to T N Srinivasan, the policies of export subsidisation
and import tariffs adopted by the government between 1962
and 1966 were a “de facto” devaluation.
Since they made imports more expensive and exports cheaper,
these policies reduced some of the pressure on India’s balance
of payments
Following the 1966 devaluation, the government initially
liberalized its trade restrictions by reducing export subsidization
and import tariffs.
These actions counteracted the devaluation to some extent but
even taking these policies into consideration, there was still a
net devaluation and, as the trade data above show, the
devaluation did stimulate exports
In the resulting backlash against economic liberalization,
quantitative restrictions and export subsidies returned, albeit at
lower than pre-1966 levels.

18. SUMMARY OF CHANGES IN FOREIGN EXCHANGE 1986-92
YEAR
IMPORT
EXPORT
TRADE BALENCE
CHANGE IN IMPORT
CHANGE IN EXPORT
TRADE BALANCE AS % OF EXPORT
1986-87
201.0
124.5
-76.4
2.2
14.3
61.4
1987-88
222.4
156.7
-65.7
10.7
25.9
41.9
1988-89
282.4
202.3
-80.0
26.9
29.1
39.6
1989-90
354.2
276.8
-77.3
25.4
36.8
27.9
1990-91
431.9
325.5
-106.4
21.9
17.6
32.7
1991-92
478.5
440.4
-38.1
10.8
35.3
8.7
APRIL DEC 1992
474.8
373.3
-101.5
38.7
23.1
27.2
APRIL DEC 1991
342.4
303.3
-39.1
7.9
30.8
12.9
1986-87
15.7
9.7
-6.0
-2.1
9.4
61.4
1987-88
17.2
12.1
-5.1
9.1
24.0
41.9
1988-89
19.5
14.0
-5.5
13.6
15.6
39.6
1989-90
21.3
16.6
-4.6
9.1
19.0
27.9
1990-91
24.1
18.1
-5.9
13.2
9.1
32.7
1991-92
19.4
17.8
-1.6
-19.4
-1.5
8.7
APRIL DEC 1992
16.6
13.1
-3.5
16.5
3.4
27.2
APRIL DEC 1991
14.2
12.6
-1.6
-22.5
-3.7
12.9
14

19. WHAT WENT WRONG IN-1991
• Inflation caused by expansionary monetary and fiscal policy
depressed exports and led to consistent trade deficits. In each
case, there was a large adverse shock to the economy that
precipitated, but did not directly cause, the financial crisis.
• Additionally, from Independence until 1991, the policy of the
Indian government was to follow the Soviet model of foreign trade
by viewing exports as a necessary evil whose sole purpose was to
earn foreign currency with which to purchase goods from abroad
that could not be produced at home.
• As a result, there were inadequate incentives to export and the
Indian economy missed out on the gains from comparative
advantage.
• 1991 represented a fundamental paradigm shift in Indian
economic policy and the government moved toward a freer trade
stance.
15

20. Continue…
• By borrowing from the Reserve Bank of India
and, therefore, essentially printing money, the
government could finance its extravagant
spending through an inflation tax.
• Additionally, the large amounts of foreign aid that
flowed into India clearly did not encourage fiscal
or economic responsibility on the part of the
government.
• In 1966, the lack of foreign aid to India from
developed countries could not persuade India to
liberalize and in fact further encouraged economic
isolation. In 1991, on the other hand, there was a
political will on the part of the government to
pursue economic liberalization independent of
the threats of aid reduction.
16

21. Continue..
• It is easy in retrospect to fault the government’s
policies for leading to these two major financial
crises, but it is more difficult to convincingly state what
the government should have done differently that
would have averted the crises.
• One relatively non-controversial target for criticism is
the tendency of the Indian government since
Independence towards large budget deficits.
• Basic macroeconomic theory tells us that the current
account deficit is roughly equal to the sum of
government and private borrowing.
• Given the fact that the household saving rate in India is
quite high, most of the blame for India’s balance of
payments problems must rest with the government for
its inability to control its own spending
17

22. SUMMARY OF CHANGES IN FOREIGN EXCHANGE 2006-12
SL
NO.
YEAR
FOREIGN EXCHANGE
RESERVE AT END OF
FINANCIAL YEAR
TOTAL INCREASE/
DECREASE IN RESERVES
1
2
3
4
5
6
2
2006-07
199.2
+47.6
3
2007-08
309.7
+110.5
4
2008-09
252.0
-57.7
5
2009-10
279.1
+27.1
6
2010-11
304.8
+25.7
7
2011-12
311.5
+6.7
+36.6
[76.9%]
+92.2
[83.4%]
-20.1
[34.8%]
+13.4
[49.4%]
+13.1
[51.0%]
+5.7
[85.1%]
+11.0
[23.1%]
+18.3
[16.6%]
-37.6
[65.2]
+13.7
[50.6%]
+12.6
[49.0%]
+1.0
[14.9%]
18
INCREASE/DECREASE IN INCREASE/DEC
RESERVES ON BOP BASIS
REASE IN
RESERVES DUE
TO VALUATION
EFFECT

23. Conclusion
• These two financial episodes in India’s modern
history show that engaging in inflationary
economic policies in conjunction with a fixed
exchange rate regime is a destructive policy.
• If India had followed a floating exchange rate
system instead, the rupee would have been
automatically devalued by the market and
India would not have faced such financial
crises.
• A fixed exchange rate system can only be
viable in the long run when there is no
significant long- run inflation
19

24. STATISTICAL REPRESENTATION OF RUPEE
DECLINE
20

25. 21

26. Chronology of India’s exchange rate policies
• 1947 (When India became member of IMF): Rupee
tied to pound, Re 1 = 1 s, 6 d, rate of 28 October,
1945
• 18 September, 1949: Pound devalued; India
maintained par with pound • 6 June, 1966: Rupee is
devalued, Rs 4.76 = $1, after devaluation, Rs 7.50 =
$1 (57.5%)
• 18 November, 1967: UK devalued pound, India did
not devalue • August 1971: Rupee pegged to
gold/dollar, international financial crisis
• 18 December, 1971: Dollar is devalued
• 20 December, 1971: Rupee is pegged to pound
sterling again
22

27. Continue…
• 1971-1979: The Rupee is overvalued due to India’s policy of import substitution
• 23 June, 1972: UK floats pound, India maintains fixed exchange rate with pound
• 1975: India links rupee with basket of currencies of major trading partners.
Although the basket is periodically altered, the link is maintained until the 1991
devaluation.
• July 1991: Rupee devalued by 18-19 %
• March 1992: Dual exchange rate, LERMS, Liberalized Exchange Rate
Management System
• March 1993: Unified exchange rate: $1 = Rs 31.37
• 1993/1994: Rupee is made freely convertible for trading, but not for
investment purposes
23

28. 24

29. 25