Devaluation is a deliberate downward adjustment to the value of a country’s currency relative to another currency, group of currencies or standard. The external value of the domestic currency reduces while the internal value remains constant. A country goes for devaluation to adjust the adverse Balance of Payments (BOP) so that exports become cheaper and imports become costlier.
On 15th August 1947, the exchange rate between Indian Rupee and US Dollar was equal to one i.e 1 Rupee = 1$. At this time there were no outside loans on the balance sheet of India, but when British left India, Indian Economy paralyzed as there were no capital formation and proper planning.
After Independence Prime Minister Nehru adopted 5-year plan model from Russia and between 1950’s to 1960’s Indian government continuously took loans from foreign agencies. In this particular period, the exchange rate for 1$ is 4.75 Rupees.
Indo-China War (1962), Indo-Pak War (1965) and the huge drought in 1966. These events crippled production capacity and increased inflation in India. India had faced a serious budget deficit and was in a state that could not borrow any loan because of the negative rate of savings. In this period rupee devaluated and 1$ = 7 Rupees.
Organisation of Arab Petroleum Exporting Countries (OAPEC) has decided to cut crude oil production which increased import rates causing Oil Shock of 1973. The assassination of PM Indira Gandhi reduced foreign investors confidence. In 1975, 1$ = 8.40 Rupees and further decreased to 17.50 Rupees by 1990.
The Economic Crisis of 1991, darkest times in India where the fiscal deficit was 7.8%, interest payment was 39% of total revenue and WPI Inflation was around 14%. India was about to be declared as a defaulter by international communities. Indian Currency again devaluated to 24.58 Rupees for 1$. This is the time when PM PV Narsimha Rao and Finance Minister Dr. Manmohan Singh rescued India from this darkest moment by declaring ‘Open Economy”.
Experts say that the value of Indian Rupee has not depreciated but in fact, the value of Dollar has appreciated. Other reasons for decrease in Rupee Value are,
• Inelastic import bill of petroleum products
• Import of gold in huge quantity
• Import of luxury goods
• Nuclear test: Pokhran-II
• Asian nancial crisis of 1997
• Global Financial slowdown of 2007–08
• European sovereign-debt crisis (2011)