War with China and Pakistan: Indian government was facing budget deficit and was in a state that it could not borrow more additional loan from outside due to negative rate of savings. Now the exchange rate became 1$= Rs.4.75Ģ. Between1950s to 1960s, Indian government continuously borrowed foreign money in the form of loan. Lack of Fund in the hands of the Government: In the situation of wealth crunch, Prime Minister Nehru adopted model of five year plans from Russia. But when British departed from India, Indian economy paralyzed in the absence of capital formation and proper planning.ġ.
Why value of Indian currency declined against US dollar:Īt the time of independence, there were no outside loans on the balance sheet of India. List of Top Five Debt Ridden Country of the World This system continued till the 1971, when the Bretton woods system collapsed with the suspension of convertibility of the dollar by the USA. This was remained unchanged till June 1966, when the rupee was devalued by 36.5% to Rs. In terms of currencies, the exchange rate was pegged to pound sterling at Rs. On 15th August 1947 the exchange rate between Indian rupee and US Dollar was equal to one (i.e., 1 $= 1 Indian Rupee). dollar.Īfter gaining independence, India followed the par value system of the IMF. Par Value System: Under this system (1947-1971), each member of IMF undertook to maintain the par value of its currency in terms of gold or the U.S. So in this system exchange rate is neither fixed nor free. Managed Exchange Rate: In this kind of system exchange rate is partially allowed to fluctuate, government don’t allows fluctuation more than 1 to 3 percent. Floating Exchange Rate: The system of exchange rate in which the value of a currency is allowed to adjust freely or to float as determined by demand for and supply of foreign exchange.įixed Exchange Rate: If the exchange rate is being determined by the government not by the demand and supply forces, it is called fixed exchange rate.
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