Page 152 - DECO303_INDIAN_ECONOMY_ENGLISH

Unit 9: Indian Currency System

In November 1957, the Reserve Bank of India Act was again revised to decrease the minimum Notes
currency reserve in foreign securities. Under the second amendment, the value of all-over
least reserve to be conserved by the Reserve Bank is ` 200 crore, of which not less than
` 115 crore should be retained as gold coins and bullion.
Thus, the present system of circulating notes in India is based on the smallest reserve
method. The chief merit of this system is that it is effortlessly elastic; supply can be
augmented up to any limit. But, there is also a threat of over-issue and inflation under such
a purely managed system.
4. Expansion of Indian Currency: There has been a constant expansion of Indian Currency
since independence. The foremost cause for this increase is deficit financing to meet the
rising needs of money supply throughout the planning period. Total currency is circulation
has enlarged from ` 4553 crore in 1970-71 to ` 48601 crore in 1989-90.
5. External Value of Rupee: The important progresses with respect to the external value of
rupee are as follows:

(i) Prior to the formation of the International Monetary Fund (IMF), India had the
genuine exchange standard and the Reserve Bank sustained the external value of
rupee in terms of sterling at the rate ` 1 = Is. 6d.
(ii) From March 1, 1947, India turns out to be the member of the International Monetary
Fund. Every member of the International Monetary Fund has to announce the parity
charge of its exchange in terms of gold (or U.S. dollar). India fixed the value of
` 1 = 0.268601 gram of pure gold (or 30.23 cents in terms of the U. S. dollar) in 1947.
But this gold parity was such that the old rate of Is. 6d was sustained.
(iii) Although India’s membership of the International Monetary Fund, the rupee’s
connection with the pound sterling continued. This link was well-thought-out to be
beneficial for India as about 30% of India’s trade was with the authentic block and
the exchange rate of rupee in relation of pound was supportive in preserving the
competitive position of India’s exports.
(iv) In September 1949, the rupee was devaluated by 30.5% resulting the devaluing of
pound. New gold parity was professed as ` 1 = 0.186621 grams (or ` 1 = 21.00 U. S.
cents).

(v) Indian rupee was further undervalued on June 6, 1966 to the extent of 36.5% and the
new gold parity rate was fixed at ` 1 = 0.118489 (or ` 1 = 13.33 U. S. cents). This time,
the reduction was demanded by the equilibrium of payments problem faced by
India.
(vi) By September 1975, Indian rupee was delinked from pound sterling. Subsequently,
the external worth of the rupee is communicated in terms of a basket of nominated
currencies and varies according to the market forces.

(vii) In a current effort to deal with the grave equilibrium of expenses crisis facing the
country, the Reserve Bank of India, in two stages, i.e., on July 1 and 3, 1991, devaluated
Indian rupee by 8.97 % to 10.15% and 10.58% to 12.31 % correspondingly in
contradiction of the four major world currencies, i.e. the U. S. dollar, the pound
sterling, the Deutsch mark and the Japanese yen.
Therefore, together the devaluation in two stages worked out to be more than 20%.
Subsequently, the dollar rises in value in relations of Indian rupee from ` 21.14 to ` 25.88;
the pound from ` 34.36 to ` 41.50; the mark from ` 11.75 to ` 14.10; and the yen from 15.22
paise to 18.62.

LOVELY PROFESSIONAL UNIVERSITY 147