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Movement Of The Rupee Since 1991

1017 words - 5 pages

Movement of Rupee since 1991
During the latter half of 1970 there was a current account surplus. That was a period of import exchange strategy and India was following a model of closed economy. During the 1980 the current account deficit began to increase resulting into a Balance Of Payment (BOP) crisis in 1991. During the 1991 Union Budget the Indian Rupee was devalued and the Indian government opened up its economy. Due to this several reform were liberalized and the economy’s exchange rate shifted from a fixed to a floating one. Hence, there was a need to analyze the current account and also the rupee movement from 1991 onwards. India always faced a current account deficit except the initial years in 2000. The deficit had been funded through capital flows and mostly capital flows were higher than the current account deficit resulting in balance of payment surplus. The surplus led to a rise in the forex reserves from 5.8 billion Dollars in 90-91 to 304.8 billion Dollars by 2010-11 (Exhibit 2). In 90-91, gold contributed to around 60% of forex reserves and forex assets were around 38%. This percentage has transformed to 1.5% and 90% respectively by 2011-12.
Figure 1: Balance Of Payments
Figure 2: Forex Reserve
In the table below we can see that during 1990 - 2000 there was a surplus in the Balance of Payment by about 4.1 billion dollars and it increased to around 20 billion dollars in the year 2000. During the period in 2000-05 and 2005-11 we can see a steep decline and a sudden rise respectively in both the capital account surplus and current account deficit. Post 2004 the Balance of Payment had been declining and became a matter of concern. There has been a rise in the Forex Reserves mainly during 2005 - 11.
Table 1: Balance of Payment

While looking at the Rupee movement in the figure below one can clearly interpret and see that the rupee has been depreciating since 1991. Figure 3 is depicting the Rupee movement against the other major currencies. The best way to understand the movement of Rupee is to track the real effective exchange rate. Real effective exchange rate (REER) is formed on basket of currencies against which a country trades and is adjusted for inflation. A rise in index signifies appreciation of the currency against the basket and a decline signifies depreciation. RBI has been releasing the Real Effective Exchange Rate for six and 36 currency trade baskets since 1993-94 and we can clearly interpret that the currency did depreciated in the 1990s but also appreciated after 2005. The currency depreciated due to the Lehman crisis but again appreciated in 2010-11.


Figure 3: Rupee Against Major Currencies. Figure 4: Real Effective Exchange Rate.

Table 2 : Exchange Rate INR/USD

India opened up its economy post 1991 but Rupee started to depreciate as it had a current account deficit. Initially current account deficit was mainly because of merchandise trade deficits. Fortunately as our service exports picked up...

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