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Why Rupee has depreciated over time? Rupee Fell Against Dollar even though US was hit worse than India during COVID

Updated: Jan 6

From the exchange rate of Rupee and Dollar being only Rs.1 in 1947 to Rs. 83 in 2023, Indian rupee has been through a lot against dollar in these 76 years post-Independence. From shifting a fixed exchange rate regime to a floating exchange rate regime there has been lot of changes on the macroeconomic level leading to depreciation of the Indian Currency against Dollar.

In 1947, after gaining Independence, India adopted the par value system of International Monetary Fund (IMF). On August 15, 1947, the exchange rate of Rupee and dollar was equal to Re. 1. In 1949, India implemented fixed exchange rate regime and the exchange rate got associated to pound sterling at Rs 13.33 and the exchange rate for Rupee and Dollar became Rs 4.75.

During the years of 1950-1960, Indian government continuously borrowed money from outside India. In the year 1960, the economic position was poor to the extent that the Indian government could not afford to even borrow money anymore. India was facing lot of problems at that time such as global and economic instability and increasing fiscal deficits. This situation was further worsened by India China war in 1962. India Pakistan War in 1965 and finally drought in 1966 due to which India became a food deficit country which needed to be dependent on imports to feed its citizens. All these factors lead to decline in the value of Indian currency from 4.75 Rs to 7.57 Rs against the dollar.

In addition to that, in the year 1973, India has to deal with Political Instability and oil shock when Organization of Arab Petroleum Exporting Countries (OAPEC) announced reduction in crude production leading to increase in the price of oil and Indian Oil Import Bills. In order to pay these bills, India once again borrowed foreign currency leading to decline in the value of Rupee. Till 1975, the exchange rate declined to 8.39 Rs and in 1990, the exchange rate of rupee and dollar reached at 17.50.

In 1991, India faced Balance of Payment crisis. This period is considered as the toughest time for Indian economy. During that phase, India had huge fiscal deficits (around 7.8% of GDP), enormous interest payments (39% of total revenue collected by the government) and high inflation (14%). Due to this unfavourable situation, the Indian Currency was devalued twice that year. First devaluation of rupee was 7-9% which happened on July 1 whereas second devaluation happened on July 3 eroding further 11% of its value and the exchange rate reached to Rs. 24.58

Year 2008, this year was a major setback not just for India but for the whole world. In 2008, Global Financial Crisis led to Great Depression in the major economies of the world such as Germany, Greece, Italy, Spain and it impacted India as well. The value of rupee declined enormously due to interdependency and interconnectedness of economies. The exchange rate of rupee and dollar reached to Rs. 43.30

Finally, the Year 2020, the year when Covid 19 Pandemic took place and again not just in India but all over the world. Due to the pandemic, major countries like India, China, Italy, US, UK, France had to implement lockdown in the country for several months which led to economic vulnerability. It was a challenging time for India when there was no economic development but high Inflation. The Indian Currency also faced volatility as foreign investors pulled their money back from India. In 2020, the exchange rate from Rupee to Dollar reached to Rs. 74.31 and in the year 2021 it reached 75.45. To address these challenges and establish economic stability, India has continuously employed financial reforms. For an example, India’s Monetary Policy Committee has hiked the repo rate by 250 basis points (2.5%) since the pandemic with the aim of bringing inflation down and within the tolerance band of RBI which is 2% to 6%.

Why did Indian rupee Depreciated Against dollar during COVID-19 and 2008 Economic Depression even though both countries Indian and US witness Economic Slow Down?

The above scenario is mainly because during such economic events uncertainty is created globally. Investors tend to seek safe-haven currencies like the U.S. Dollar during times of uncertainty. The demand for the Dollar increased, leading to its appreciation against many other currencies, including the Indian Rupee.

Further, in times of uncertainty, investors may pull their money out of emerging markets and move it to safer assets in developed markets. This capital flight can put pressure on the currencies of emerging market economies, leading to depreciation. India experienced outflows from its financial markets, contributing to the depreciation of the Rupee

Even today, Monetary Policy Committee is closely monitoring worldwide financial developments (such as hikes by Federal Reserve), economic growth and Inflation level of India in order to take further policy decisions. However, controlling inflation is a difficult task which will be a work in progress for India for further some time due to which economic growth and stability are uncertain for quite some more time. Along with this, India is taking efforts to promote Indian Currency for International Trade with countries like Russia to improve the international position of Rupee in world. Again, these efforts will also take some time to improve the positioning and value of Indian Currency which is currently being traded at around Rs. 83 against dollar.


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