The Break of Rupee-Pound Sterling Association

Introduction

The association of the Indian rupee with the pound sterling as the intervention currency dates back to the colonial era when India was under British rule. The intervention currency meant that the value of the Indian rupee was pegged to the pound sterling.

Break of Association

The association was broken in 1992 when India faced a balance of payments crisis. The central bank of India, the Reserve Bank of India (RBI), was running out of foreign exchange reserves to defend the rupee's value against the pound sterling. In a bid to stem the outflow of foreign exchange, the RBI decided to devalue the Indian rupee by 20-25% against major currencies, including the pound sterling.

Reasons for Break

The reasons for the break of association were as follows:

1. Balance of Payments Crisis: India was facing a balance of payments crisis, and the RBI was running out of foreign exchange reserves to defend the rupee's value against the pound sterling.

2. Devaluation: In a bid to stem the outflow of foreign exchange, the RBI decided to devalue the Indian rupee by 20-25% against major currencies, including the pound sterling.

3. Economic Reforms: The break of association was also a part of the economic reforms initiated in 1991 to liberalize the Indian economy and move towards a more market-oriented system.

Impact

The impact of the break of association was mixed. The devaluation of the Indian rupee made exports more competitive and boosted the economy in the short term. However, it also led to inflation and higher import costs, which hurt the common people in the long run.

Conclusion

In conclusion, the break of association between the Indian rupee and the pound sterling was a significant event in India's economic history. It marked a shift towards a more market-oriented economy and helped India weather a balance of payments crisis. However, it also had its downsides, such as inflation and higher import costs.