With increasing cross border capital flows, the potential of the global currencies being exposed to the exchange rate fluctuations is on the rise. In such a scenario it becomes even more difficult to decide the type of exchange rate that needs to be adopted by a nation. This article provides a detailed commentary of India's exchange rate policy over the last five decades and what the need of the hour is.
Of late, global observation has revealed the fact that most of the developing countries have consciously moved from a "fixed" to a "floating" exchange rate structure. The process of transformation was initiated with the breakdown of the Bretton Woods system of fixed interest rates and it was from this time that most of the world's major currencies began to float. Initially, most of the developing countries continued to peg their exchange rates either to a single currency, usually the US dollar or the French franc, or pound Sterling or even to a basket of several currencies. During the late 1970s, these countries began to move to a basket of peg and during the 1980s most of them shifted from currency pegs towards a more flexible exchange rate policy. Though the reasons for this shift can be varied, one primary reason for the shift from the fixed peg to a floating rate was the appreciating dollar. Further, the rise in inflation in many of the countries was another reason for the change. Those countries where the inflation rates were higher than their trading partners often resorted to depreciate their currencies so as to prevent the loss of their competitiveness with such partners.
One of the major problems that India faced during the post-independence era was that of foreign exchange scarcity. This can be viewed both as a cause and a consequence of the nation's choice of developmental model whose negative implications reflected on the country's economic performance, especially when compared to emerging economies. Just after independence, India was left with a positive sterling balance that arose mainly from its war contributions. The exchange rate that followed before the independence continued with the rupee being pegged to the British pound sterling, just like it was during the pre war days. Later in 1949, when the pound was devalued, the existent rupee-sterling parity continued which led to an effective devaluation. |
