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HindustanTimes Thu,28 Aug 2014

Life line of a rupee: a look back, and a peek into the future of currency

Gaurav Choudhury , Hindustan Times   August 24, 2013
First Published: 23:25 IST(24/8/2013) | Last Updated: 10:10 IST(25/8/2013)

Yesteryear humourist Mehmood was more than symbolic when he crooned 'Na Biwi na bachcha na baap bada na maiyya / The whole thing is that ki bhaiyya sabse bada ruppaiya' in the 1976 movie Sabse Bada Rupaiya.

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The movie, released a few years after a politically controversial move to devalue the rupee in the mid-sixties, mirrored the inescapable importance of the currency note in India's socio-economic milieu.

India's currency history is a spectacular continuum since the ancient ages to the current rough-and-tumble of a globalised economy, with each era's coinage, and worth, broadly imitating the prevailing political, social and economic environment.

Early days
'Punch Marked' coins of the 6th-7th century are believed to be the first documented use of currency in India — called thus because of the peculiar technique to make them by thumping bear symbols into silver planes.

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The '­­­­­rupiya', which has evolved into the modern-day rupee, was first introduced as a silver coin for transactions by emperor Sher Shah Suri, who built the Grand Trunk road in the 16th century.

It also, perhaps, holds out lessons on the role of currency and household savings in raising public resources to build massive projects.

Thrifty households could well turn out to be the primary financiers of highways and ports if India's savings sustain at high levels, primarily due to its armies of young people entering the workforce.

Post-Independence
In 1947, one could change a rupee — worth a US dollar then — into 16 annas, but in value, this was no loose change. Those days, for an anna you could buy a kilo of ghee, now priced anywhere between Rs. 300 and 400—a nearly 2000-fold jump.

India's exchange rate has developed from a fixed-regime where the government and RBI determined the rupee's value — similar to what China does for its Yuan against the dollar — to a market-ruled system determined by the laws of demand and supply, pretty much like other commodities.

Between 1947-1971, India followed a 'par value system' where the rupee's value was fixed at 4.15 grains of fine gold. The currency's devaluation in June 1966 reduced the par value of rupee to 1.83 grains of fine gold.

Devaluation
In 1966, the government announced its first major intervention in the foreign exchange market announcing the rupee's "devaluation" by 37.5%. (From Rs. 4.75 the dollar became expensive to Rs. 7.50 in one single stroke.)

A devalued or depreciated currency boosts exporters' earnings in rupee terms. For every dollar, a devalued currency gives them more in rupees. This encourages them to slash prices for their goods in the world market making them more competitive than global peers.

Two wars — with China in 1962 and with Pakistan in 1965 — had crippled the Indian economy. The broad objective of the devaluing the rupee was to raise export earnings, liberalise imports and boost India's chances of securing more foreign aid, underlying the importance of currency administration as a policy tool.

According to John P Lewis, who was the head of the USAID mission to India in the mid-sixties: "Devaluation was not an aid in itself. Devaluation was an instrument; it was essential if freeing the market was to work. Whether formally or de facto, it had to come sooner or later, and in purely economic terms, it made sense to get on with it."

Twenty five years later, buffeted by a precarious balance of payment crisis, Manmohan Singh, who was the finance minister between 1991 and 1996, again devalued the rupee in 1992 to encourage exports and earn precious dollars. The rupee's value fell sharply from just over Rs. 25 to a dollar to near Rs. 32 to a dollar.

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That was the last time India has used devaluation as an economic policy instrument. India has since moved on to a fully market-determined exchange -rate regime. Trans-continental capital movements decided by the click of a jumpy computer mouse play a key role in deciding the worth of the rupee, which only three years ago joined the elite club of symbol-endowed national currencies that include the dollar, the pound, the euro and the yen.

Pain ahead
The rupee has had a sharp fall since May and is menacingly threatening to canter past Rs. 70 to a dollar. If the country's top economy managers have gone into a huddle after the currency's recent slide, it is only symptomatic of the anxiety inflicting India's broader economy.

Ever since the world recovered from the dotcom bust and found a new mantra — emerging markets — foreign investment, both direct and financial, has been chasing an India Story that delivers returns in high double digits a year. The tide has since turned, bringing the rupee and other emerging market currencies, down.

Analysts warned of more pain ahead as the world settles down to a new normal state of economy.

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"Taming inflation or the currency (as is the case currently) may require policies that result in increasing the economic misery for people in the near term. Unfortunately, we see no short cuts," said Sonal Varma, economist at Nomura.

Eventually, funds will return to India and its peers, for these will remain the islands of global growth. As Herbert Stein, a former economic adviser to US Presidents Richard Nixon and Gerald Ford had presciently observed: "If something cannot go on forever, it will stop." India's policy makers, and its people, will only be hoping that Stein's rule proves true for halting the rupee's free-fall.

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