RBI effects highest devaluation of the rupee in 25 years

HT's reports on two separate devaluations in the wake of a balance of payments crisis

- HT Correspondent

Less than two weeks after assuming office, and even before it has presented the Union Budget, the PV Narasimha Rao government has made a big economic policy decision by a sharp devaluation of the rupee.

The Reserve Bank of India (RBI) has devalued the rupee by more than 20% against various currencies in two back-to-back devaluations over July 1 and 3. As a result of the decision, the dollar has gone from Rs 21.01 to 25.98. The rupee has also been depreciated by a broadly similar magnitude against currencies such as the Pound Sterling and Japanese Yen. The latest devaluation is the sharpest since the 36% devaluation by the Indira Gandhi government in 1966.

RBI's devaluation decision comes in the wake of a serious balance of payments and macroeconomic crisis in the economy over the previous year. India had to ship 20 tonnes of its official gold reserves in May to raise $234 million worth of foreign exchange reserves to tide over the balance of payments crisis. This move came after a ratings downgrade by S&P in March. Foreign exchange reserves have fallen each month from January to June this year from $6.4 billion to $4.7 billion.