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The Rupee over the Years
The Indian Rupee has been depreciating in a Step Formation, but roughly in line with the fall in its Purchasing Power Parity since the early 1980s. While the PPP was 15 around 1982, the actual exchange rate was 9.30 per US Dollar. Today the actual rate is near 43.60.
From Crisis to health
The currency was officially devalued by 19.5% in two steps over 2nd-4th June 1991, from
20.5 to 24.5, in response to a severe Balance of Payment crisis when the country had
reserves enough to pay for only two months of import. The government at that time
mortgaged a part of its "confiscated" gold reserves and negotiated a stand-by
facility with the IMF to stave off any external debt crisis. From June 1991 onwards India
embarked on economic reforms which resulted in, among other things, a much healthier
Balance of Payments position with FX Reserves of more than $ 35 billion.
Changeover
Till just after the devaluation, the Rupee was a controlled currency with the Reserve Bank
of India (RBI) changing its value in line with a basket of currencies. The RBI used to
announce the official rate of the Rupee vis-a-vis the Sterling Pound on a daily basis.
After the devaluation, the Rupee moved from a controlled regime to a "Managed"
or "Dirty" float regime, where the exchange rate is supposedly determined by the
market and not dictated by the RBI. This transition took place in two phases over the period early 1992 to early1993.
Dead Man's Heartbeat and Vertical Cliffs
As can be seen in the graph alongside, the Rupee has followed a pattern of sudden and large
derpreciation after a long period of stability. During the periods of stability, the
currency almost does not move and the graph mimics a dead man's heartbeat. Thereafter,
almost without a clue the currency goes into (almost) a freefall. The phases are:
| Dead Man's Heartbeat | Vertical Cliff | |||
| Period | Range and % Change | Period | Range | Max Depreciation |
| August 91-March 92 | 25.60 - 26.00 (1.56%) | End March 92 | 25.95 - 30.55 | 17.73% |
| April 92 - Jan 93 | 30.55 - 31.75 (3.93%) | February 93 | 31.30 -33.59 | 7.32% |
| March 93 - August 95 | 31.37 - 31.96 (1.88%) | Sept 95 - Feb 96 | 31.89 - 38.55 | 20.88% |
| July 96 - August 97 | 35.50 - 35.90 (1.12%) | Aug 97 - Aug 98 | 35.70 - 42.76 | 19.78% |
| August 98 - March 2000 | 42.45 - 43.61 (2.73%) | Cliff coming up? | ||
History repeats itself
There have been two notable exceptions to the above pattern. After the 20.88% fall in the
Rupee over Sept 95 to Feb 96, the RBI imposed a number of severe restrictions on the
market and sent overnight money market rates soaring to almost 100% to stop the Rupee from
falling further. The currency gained strength, from 38.55 to 34.30 before falling again to
35.70 where it settled upto August 97.
Again in Jan 98, after a 13.45% fall in the Rupee in the wake of Asian crisis, the RBI rolled back interest rate cuts, imposed a number of severe restrictions on the market and sent overnight money market rates soaring to almost 100% and stop the Rupee from falling further. The currency gained strength, from 40.50 to 38.30 before falling again to 39.55 where it settled.
Thereafter, the Rupee again flared up, to 42.76, as a reaction to the US Sanctions and Ratings downgrade in the aftermath of the nuclear tests. RBI again imposed restrictions on the market and intervened in the market to keep the Rupee steady. The successful float of the USD 4 billion Resurgent India Bonds issue was a major factor shoring up the country's FX Reserves in that trying time.
The dust having settled, the Rupee has slowly lost ground, from 42.45 (Aug '98) to 43.61 (March 2000) in a movement which once again resembles a Dead Man's Hearbeat. The RBI's presence is felt all the time in keeping the market dead. Hereafter, if the world equity markets fall in a couple of months, maybe we may see a minor Vertical Cliff being formed? We need to wait and watch
In the meanwhile, you can read about the Structure of the Indian Rupee Market
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