The foreign exchange rates have always puzzled me.
A few questions remain inadequately answered.
For instance, on independence, one rupee was equal to one dollar and was quite near to being equal to one pound. Isn’t it surprising that despite being a very poor nation we had a very favorable exchange rate. It meant that it made imports more attractive.
But we could not sustain the same conversion rate. Rupee got drastically hammered and soon enough even before the fifties we saw the exchange rate moving against Rupee.
In the international market, during those days we followed a fixed exchange rate. Our imports continued to rise and the exports could not match up, leading to huge trade deficits.
The pressure to devaluate Rupee went on increasing because, the demand for Dollars was very high as against the demand for Rupee. This led to a series of devaluation until the nineties when Rupee was priced at Rs.32 against the Dollar.
It was in late nineties, that a decision was taken to make Rupee partly convertible. For revenue transactions it was freely convertible except some restrictions. And for capital transactions stricter restrictions were placed.
Today, the exchange rates are staggering at Rs.82+ against a dollar and 100+ against a pound.
If we look at the purchase power parity the exchange rate would be somewhere near Rs.25+ against a dollar and Rs.30+ against a pound.
Does it mean that after independence India has performed so badly as compared to USA and UK? Answer is obviously No.
There are a few reasons which I have in mind for the drop in the exchange rate:
1. The exports of some scarce materials at very low price which were taking place prior to independence seem to have been reduced or stopped.
2. To catch up technologically and to meet bare essential needs, we have allowed more imports.
3. The strong currencies have created huge demand for their currencies through soft paddling and allowing the tax havens to grow and prosper. We are aware that most of these tax havens provide almost zero tax, nearly complete secrecy about the monitory transactions and they are fully blessed and under the control of USA and UK. The large transactions of illegal trade and corruption tainted money are routed through these tax heavens, creating a spike in the demand for dollars and pounds as compared to most of the other currencies including naturally rupee.
I think the third reason plays the most important role in pushing down the value of rupee in international trade. Surprisingly, almost all trading companies prefer to trade in the “popular” currencies, which further accelerate the downward pressure. Making any other currency “popular” without resorting to unfair means as explained above seems to be an almost impossible task. The developing countries will have to live with these artificially padded exchange rates God knows for how long.
What say you?
