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25 years of the rupee's historic devaluation

In the early 1990s, India was facing a crisis of epic proportions.


The government could barely afford to repay its debts. Its foreign exchange reserves were depleted up to the point that the country could barely finance a few weeks worth of imports. Bank funding was hard to get by. There was loss of investor confidence which was worsened by political uncertainty. The situation deteriorated with credit rating agencies downgrading India’s rating.


The crisis prompted the Indian government to initiate a series of measures to stem the tide. The rupee was devaluated by 9% and 11% between the July 1 and the July 3, 1991.


The devaluation was carried out for three reasons as RBI economists Pami Dua and Rajiv Rajan point out. First, to counter the sharp drawdown in forex reserves; second, to instil confidence among investors; and third, to improve competitiveness.  


It was followed up by a liberalised exchange rate management system which involved a dual exchange rate system. This was then replaced by a unified exchange rate system in March 1993.


As a consequence of these changes in the exchange rate regime, the rupee was effectively devalued by around 35% between July 1991 and March 1993. As a result, by 1993-94, the trade deficit shrunk to almost a sixth of its size, while non-oil trade balance moved to a surplus, from a deficit before. One must point out that both episodes of devaluation, the one in 1991 and the one in 1966 were preceded by a macro-economic crisis – large fiscal and current account deficits and loss of investor confidence.


The Congress government under Prime Minister P V Narasimha Rao launched a program featuring macroeconomic stabilization and structural reforms. The structural measures involved industrial and import delicensing, trade liberalization, financial sector reform, and tax reform.

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