Exchange Rate Management : The Indian Experience

India's exchange rate policy has evolved in line with international and domestic developments. Post-independence, in view of the prevailing Bretton Woods system, the Indian rupee was pegged to the pound sterling due to its historic links with Britain. A major development was the devaluation of the rupee by 36.5 per cent in June 1966. With the breakdown of the Bretton Woods system, and also the declining share of UK in India's trade the rupee was delinked from the pound sterling in September 1975. During the period between 1975 to 1992, the exchange rate of the rupee was officially determined by the Reserve Bank within a nominal band of plus or minus 5 per cent of the weighted basket of currencies of India's major trading partners. The Reserve Bank intervened on a day-to-day basis which resulted in wide changes in the size of reserves. The exchange rate regime of this period can be described as an adjustable nominal peg with a band.

The beginning of 1990s saw significant rise in oil prices and suspension of remittances from the Gulf region in the wake of the Gulf crisis. This and other domestic and International developments, led to severe balance of payments problems in India. The drying up of access to commercial banks and short-tern credit made financing the current account deficit difficult. India's foreign currency reserves fell rapidly from US S 3.1 billion in August to US S 975 million on July 12, 1991.

In the post Independence Era, under India's Exchange rate Policy, the Indian Rupee was pegged with Pound Stering. The reason behind was :

Britain ruled India

The correct answer is option (1) : Britain ruled India

In the post-independence era, India's exchange rate policy initially pegged the Indian rupee to the pound sterling primarily due to historical links with Britain.

Following independence in 1947, India inherited many economic systems and institutions from British rule. Pegging the rupee to the pound sterling provided continuity and stability in the immediate post-colonial period. The Bretton Woods system, which was the prevailing international monetary system at the time, also influenced this decision. This system fixed exchange rates between major currencies and the US dollar, which was itself backed by gold. Since Britain was a major player in this system, pegging the rupee to the pound sterling made sense in that context.