This article is written in response to the fact highlighted by Livemint today on the 50th anniversary of second rupee devaluation when Indian Rupee lost 57% of its value against Dollar and went down from Rs 4.76/dollar to Rs 7.50/dollar in one day.
What triggered the crisis?
Rupee was pegged to Pound which meant one could exchange fixed amount of Rupees for Pound as guaranteed by the RBI.
The 1965 war with Pakistan increased government expenditure. Foreign aid was cut down, Indian imports were higher than exports and pressure built on foreign reserves.
RBI could no longer guarantee the fixed exchange rate due to depleted reserves.
What did RBI do?
With one stroke of pen, it changed the exchange rate from Rs 4.76/dollar to Rs 7.50/dollar. This eased pressure on reserves in the short run but did not give any long run benefits.
Did it help Indian economy?
In normal circumstances exchange-rate devaluation helps the economy by boosting exports. But India did not gain much at that point because it was still a Licence Raj economy.
To exploit a weaker currency one needs domestic industry which can produce competitive goods for export. Indian firms were not allowed to start or expand production without government approval.
In a floating exchange-rate regime, which India uses now, the exchange rate depends on demand for the currency in international markets. Central banks can smooth short-term volatility but cannot control the currency indefinitely.
P.S. Look at the date of devaluation. Can 6/6/66 be put under 666-ie number of the beast?
Image credits:
http://www.thehindu.com/business/markets/rupee-turns-weak-down-43-paise-against-dollar/article4809606.ece
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