Rupee At 80: How The Indian Currency Has Aged

The Indian rupee fell to below 80 against the U.S. dollar early Tuesday amid rising global interest rates, a stronger dollar, foreign portfolio outflows, and a widening trade deficit.

There is nothing sacrosanct about the level but round numbers seem to attract attention and, so, the rupee moved into its 80s.

A look back at the milestones will bring back memories of the variety of challenges faced by the economy and the rupee over the years. Some of these memories now relegated to the history books; others fresh in our minds.

Data on Bloomberg is available starting 1973 on a quarterly average basis.

The rupee turned 10 in the quarter ended March 30, 1983. A young one, the rupee was very much under the central bank's control at the time.

The Reserve Bank of India's annual report for the year tells us that this was a difficult year for the economy. Agricultural output had suffered due to a severe drought, the second in five years. This weakened demand and, in turn, industrial output. For the fiscal year 1982-83, the Indian economy was set to grow just 1-2% in contrast to 5% growth in the previous year, the annual report noted.

In response, the RBI brought down lending rates to help demand.

India was mostly a closed economy at the time. Nevertheless, this was a year when there was a global recession as well. Against this backdrop, India had seen a small improvement in its balance of payments, with the trade deficit declining to Rs 5,409 crore from Rs 5,752 crore.

The rupee, still pegged against a basket of currencies at the time, fell over 5.7% against the dollar and 2.5% against the Deutsche mark that year, even though it appreciated against the pound and the franc.

The currency moves into its 20s in the quarter ended June 1991. Like all of us, the 20s were a period of turbulence and growth.

This, as we all know, was an eventful time for the Indian economy. Foreign currency reserves had been falling, dropping to less than a billion dollars by July that year. It led to the country pledging its gold reserves with the Bank of England and the Bank of Japan. Eventually, the crisis brought on the 1991 reforms.

Alongside, the rupee was devalued twice that year.

The first was a 9% devaluation on 1 July 1991; two days later the rupee was devalued by another 11%. This, according to the RBI's annual report for the year, was done to ensure export competitiveness for the economy. Alongside, a sizeable devaluation was needed to dampen market anticipations, the annual report said.

The fiscal year ended with the rupee at 28.70.

The rupee hit its 30s in 1993, another eventful year for the currency.

The rupee was made partially convertible in March 1993. The RBI annual report for the year speaks of speculative attacks on the currency in the lead up to the decision, which weakened the currency. Thereafter, though, the "remarkable stability" was seen in the exchange rate, the RBI said.

The was also a year in which India saw a sharp jump in forex reserves from about $9 billion in March 1993 to $19 billion a year from then. Both the current account and the capital account were improving. Exports rose to $22 billion that year.

The 40s—the years of responsibility—hit in the April-June quarter of 1998.

The market, the RBI documents in its annual report, was "driven by downside expectations created largely in the backwash of the currency turmoil in South-East Asia and political developments within the country".

1997 had been a politically turbulent year with the Deve Gowda and I.K. Gujaral governments falling. The international environment was also turbulent against the backdrop of the Asian currency crisis. This was also the time of the Pokhran nuclear tests and subsequent sanctions against India.

The rupee slipped into its 50s against the backdrop of the global financial crisis in the October 2008 quarter.

Few will need reminding of those years. As the global financial system went into a tizzy in the aftermath of Lehman Brothers' collapse, India, now far more integrated with the world, was not immune. The fiscal year 2008-09 saw nearly Rs 45,000 crore in foreign portfolio outflows, alongside a strengthening dollar, which weighed on the rupee.

The September 2013-ended quarter was when the rupee turned 60. This, too, was a time of turbulence, albeit one where India's own vulnerabilities came to the fore.

High inflation and twin deficits had left India open to currency weakness. In defense of the currency, India attempted to use a number of tools including the interest rate defense by hiking short-term rates.

Eventually, the central bank used a special window to draw in foreign currency deposits as a way to shore up reserves. That, together with a formal commitment to move towards inflation targeting, broke the cycle of rupee weakness.

The weight of the 70s hit the rupee in the September 2018 quarter, at a time when global emerging market currencies were once again seeing a selloff. Crude prices were high, the dollar was strong and the rupee slipped into its 70s.

The eighties have hit against the backdrop of the sharpest and most coordinated monetary tightening the global economy has ever seen. Soaring inflation in the aftermath of the Covid crisis is forcing central banks to raise rates sharply. The U.S. Federal Reserve is leading these rate hikes, leading to higher bond yields in the U.S. and a stronger dollar. While commodity prices have come off their highs, they remain elevated.

For India, this has meant a widening trade deficit and current account deficit. Alongside, nearly Rs 1.19 lakh crore in portfolio money has exited India in the current financial year alone, leaving India staring at an expected balance of payments deficit of close to 1.5% of GDP.