Devaluation means officially lowering the value of currency in terms of foreign currencies. Devaluation is the result of official government action. Despite government attempts to obtain a positive trade balance, India suffered a severe balance of payments deficits since the 1950s. Inflation had caused Indian prices to become much higher than world prices at the pre-devaluation exchange rate. When the exchange rate is fixed and a country experiences high inflation relative to other countries, that country’s goods become more expensive and foreign goods become cheaper. Therefore, inflation tends to increase imports and decrease exports. Since 1950, India ran continued trade deficits that increased in magnitude in the 1960s. Another additional factors which played a role in the 1966 devaluation 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. Because of all these reasons, Government of India devalued Rupee by 36.5% against Doller, one of the largest devaluation.
Some key events in Rupees’ life
1947: Rupee tied to pound, Re 1 Rupee = 1 Pound
1966: Rupee was devalued by 36.5%. At that time Rs 4.76 = $1, after devaluation it became Rs 7.50 = $1
1971-1979: The Rupee is overvalued due to India’s policy of import substitution
1975: India links rupee with basket of currencies of major trading partners.
1991: Rupee devalued by 18-19 %
1993: Unified exchange rate: $1 = Rs 31.37
1993/1994: Rupee is made freely convertible for trading