India's 1966 Rupee Devaluation and Reserve Currency Status: A Critical Analysis

Abstract

The transformation of the Indian Rupee into a multi-continental reserve currency is changed into a domestic instrument, is one of the most important but least studied monetary disasters in the history of monetary post-colonial economics. The Rupee was the legal tender in the period of the time between 1947 and 1966 within the Persian Gulf and East Africa hence settlements of trade, oil within as well as remunerations of millions of people. The special position of the Rupee which was brought about by remnants of British imperial currency systems produced acute economic benefits, such as seigniorage accrual, lower transaction cost, and greater diplomatic bargaining power. With the encouragement of the International Monetary Fund and the World Bank, Prime Minister Indira on 6 June 1966 promulgated the devaluation of the currency which with a contraction of the parity of the Rupee of 36.5 per cent, undermined international confidence in the currency. All Gulf states abandoned the Rupee and shifted to monetary systems pegged to the Dollar within a seven-year period, and East African jurisdictions at the same time shifted to de-legalized, sovereign currencies. This enquiry examines the policies that caused the Rupee system to go wrong globally, challenges the politics of the political economy of the decision of 1966, evaluates the prescient nature of the warnings delivered by the domestic economists, and assesses the strategic consequences of this policy failure that have long-run reconstructions, which is proving crucial in the deliberation of the present regarding monetary sovereignty and a reserve currency group.