Why was the Rupee Devalued in 1991?

By BYJU'S Exam Prep

Updated on: November 9th, 2023

The Rupee was Devalued in 1991 because of the large fiscal and current account deficits, dwindling international confidence in India’s economy, inflation, and consistent trade deficits. The lowering of the rupee value in terms of foreign exchange is called rupee devaluation. It is done by the government. The Indian government depreciated the rupee by 18–19% in July 1991.

Devaluation of the Rupee in 1991

India had to devalue the rupee since the country was going through a severe economic crisis. India only has a few days’ worths of foreign exchange available to conduct short-term international trade. The nation was struggling with its balance of payments.

The government also modified its trade policy from one that was quite restricted to one that permitted exporters to import 30% of the value of their exports through a system of freely tradable EXIM scrips (Gupta, pp 73-74).

Rupee devaluation has positive and negative impacts on the Indian economy. Devaluation leads to an increase in exports and a decrease in imports as imports become costlier.

Positive impact of Rupee Devaluation

  • Improvement in the current accounts.
  • The agricultural sector witnessed profit due to an increase in exports.
  • Increase in foreign direct investment (FDI).

Negative impact of Rupee Devaluation

  • Petrol, food, and raw material become expensive.
  • This affects the infrastructure sector as the prices of steel, cement, etc., are increased.
  • Impact on the long-term economic growth by the reduction in investment.

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