Why value of Indian currency declined against US dollar:
At the time of independence, there were no outside loans on the balance sheet of India. But when British departed from India, Indian economy paralyzed in the absence of capital formation and proper planning.
1. 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. Between1950s to 1960s, Indian government continuously borrowed foreign money in the form of loan. Now the exchange rate became 1$= Rs.4.7
2. 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. India- China war of 1962, Indo-Pakistan war of 1965 and huge drought in 1966, crippled the production capacity of the Indian economy so inflation increased in the economy.
To increase the domestic production scenario, Indian government needed technology , to have technology and to tackle higher inflation and to open the Indian economy for foreign trade, government devalued external value of rupee and now
exchange rate became 1 $- Rs. 7.
3. Political Instability and Oil Shock of 1973: Oil shock of 1973 caused when the Organization of Arab Petroleum Exporting Countries (OAPEC) decided to cut the crude oil production which further increased the oil import bill. So to pay this import bill India borrowed foreign currency which reduced the value of Indian currency. Assassination of P.M. Indira Gandhi also reduced the confidence of foreigners in the Indian economy. Hence all these cases bring the exchange rate at USD = 12.34 INR in 1985 and in the 1990 it became to 1 USD = 17.50 INR.
4.. Economic Crisis of 1991: It is claimed as the toughest time for Indian economy. During this phase fiscal deficit was 7.8 % of GDP, interest payment was eating 39% of the total revenue collection of the government, Current Account Deficit (CAD)was 3.69% of GDP and WPI inflation was hovering around 14%, India was about to be declared defaulter by the international community. So to tackle all these problems government devalued Indian currency again and the exchange rate became 1 USD = 24.58 INR
5.Other Reasons: Experts are saying that the value of Indian rupee has not depreciated but in fact the value of Dollar has appreciated due to expectations against US that US Federal Bank might increase the interest rates. Other reason includes...
• Inelastic import bill of petroleum products
• Import of gold in huge quantity
• Import of luxury goods
• Nuclear test: Pokhran-II
• Asian financial crisis of 1997
• Global Financial slowdown of 2007–08
• European sovereign-debt crisis (2011)
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