NEW DELHI: For the second time this week, the exchange rate of the rupee was brought down sharply by the Reserve Bank of India, with its value dipping by about 21% against major currencies since Friday.

Wednesday’s slide in the value of the rupee ranging from 10.6 to 11.1% is even sharper than Monday’s revision which ranged from 8.5 to 9.7%.

This is the first time that such 3 major drops in the value of the rupee has been effected since its devaluation by 36.5% in 1966.

With the revision on Wednesday, the value of the rupee has gone down by 17.4% against the pound since Friday last. The pound will now cost Rs.41.59 as against R.s 34.36 on Friday.

The dollar will cost Rs.25.88 as against Rs.21.01 on Friday, registering a fall of 18.8% in the value of the rupee. The DM will fetch Rs.14, 10 against Rs.11.66 on Friday, while the yen will now cost 18.62 paise as against 15.22 paise. The fall in respect of DM was 17.3% and that of Yen 18.3%.

After the downward revision on Monday, the rupee picked up marginally Tuesday against pound sterling, DM and Yen by 0.5%, of 0.8% and 0.5% respectively. Its value against the dollar remained static.

The downward revision in the rate of the rupee is widely seen in the country and outside as linked to India’s attempt to secure a major IMF loan of between five and seven billion U.S. dollars.

Although the revision in the rate of the rupee has been officially described as a routine adjustment of exchange rates, according to financial circles the magnitude of the fall indicates that it is a matter of deliberate policy.

While financial and banking circles were expecting another downward revision, the timing of the slide has taken them by surprise, Although with Wednesday’s revision, the slide in the rate of the rupee is substantial, there is widespread belief that this may not be the last such move. ,

The downward revision appears to be aimed at boosting exports by giving them a competitive edge in prices in international market and to discourage imports, thereby reducing the trade deficit.

 The move comes in the wake of the worst ever  balance of payments crisis facing the country with mounting debt burden and depleting foreign exchange reserves. Manmohan defends action.

Finance Minister Dr. Manmohan Singh said the sharp downward revision of rupee against major international currencies twice in the last three days was done to “prevent a run on rupee”.

He said at a news conference here that there was this “destabilizing danger” which the country could not have coped up with in view of the “precarious” BOP position.

Dr. Singh said the downward revision of the rupee by about eight to nine percent on Monday and again by about 10 to 11% Wednesday, was done keeping in line with the promises made in his party’s election manifesto of having realistic exchange rates.

Following this revision, the exporters would no longer find it profitable to hold back dollars abroad besides helping cut imports drastically by making it dearer.

Singh also said this would help restore credit worthiness of the country abroad.

He also announced that as a follow up government would carry out a measure of trade policy reform this day to give “impetus” to the trade system which it had not known for a long time now.

Dr. Singh said the BOP position was so grave that it was becoming difficult to meet the international commitments.

He said this led to grave speculation about the future of the Indian currency and had led to a lot of insecurity particularly among NRI deposit holders in the country.

The revision of exchange rate, Singh said, would not only arrest these tendencies but also inject more dynamism in the country’s exports.

Dr. Singh said the ruling Congress-I party was committed to strengthening the BOP position. As “this is a government which worked”, Singh said it wasted no time in announcing realistic exchange rates for restoring the health of the economy. .

PM defends devaluation

 NEW DELHE: Indian prime minister P V Narasimha Rao Wednesday said that the decision to depreciate the rupee against major currencies was taken to avert “a greater disaster”, ‘There was no question of anyone pressurizing India to take the decision, he said.

“It is our own decision, a considered decision and we have thought over it for a long time. We came to the conclusion that unless we take the decision we will be facing greater disaster,” the prime minister said in an interview to PTI.

Explaining the circumstances which compelled the government to go in for this hard decision, Rao said the finance minister had explained the “very critical” balance of payment position and gave certain figures which were so alarming that in the next few days “we were to become defaulters” in repayment of loans.

This was the situation which India could never afford and the government had to take “some firm and far reaching steps” to see that this situation was averted, he said.

AS such, the prime minister said, he was fully convinced that the government had undertaken this step after a good deal of deliberations. “It is not an easy decision,” he said, adding that this hard decision had been postponed for some time. It had fallen on the lot of the new government to take an immediate decision on the issue.

The prime minister said he had forewarned that his government would have to take some hard decision on the economic front and was confident that the people would support the measure.

“I am fully convinced that what we have done is right and we have done it in time to avert a greater disaster,” he noted.

Asked if the decision to depreciate the rupee was taken under IMF pressure, Rao said there was no question of anybody pressurizing India.

He explained “If you postpone a decision indefinitely to a point where you come into with some problems with international monetary institutions, the fault is not of the institutions. The fault lies with those who have postponed it,”” While making this observation, the prime minister said he was not saying anything against any person or government. “What I am saying is a stitch in time saves nine. If we do not take decisions in time, we will be seen as taking decisions too late,” he said.

Keeping in view the realignment of the rupee that has taken place since Monday, the government is likely to announce withdrawal of export subsidies in the form of cash compensatory support (CCS), sources close to the prime minister said.

According to the sources, the subsidies have become redundant. This will save R.s 20 billion, _ Modified rep (replenishment System) will be introduced, the said.

Article extracted from this publication >> July 12, 1991