The Rupee's Big Devaluations: 1966 and 1991

Why India devalued the rupee sharply in 1966 and again in 1991, the crises behind these decisions, and what they taught about exchange rate policy.

India twice made dramatic changes to the rupee’s value during crises.

1966: the big devaluation

In the mid-1960s, India faced:

Wars with China (1962) and Pakistan (1965).
Droughts in 1965 and 1966, causing food shortages.
A balance of payments crisis.
Pressure from the World Bank and the US for reforms.

In June 1966, India devalued the rupee by about 57 percent, from about 4.76 to 7.50 rupees per dollar.

The devaluation was unpopular. Critics felt it was imposed by foreign pressure, and without accompanying reforms and good harvests, its benefits were limited in the short run. It made later governments wary of devaluation.

1991: devaluation and reform

In 1991, India faced a severe balance of payments crisis:

Foreign exchange reserves fell to a few weeks of imports.
India pledged gold to raise emergency loans.

In July 1991, the RBI devalued the rupee in two steps, by around 18 to 19 percent against major currencies. This was part of wider economic reforms.

From fixed to market-determined

After 1991, India moved to a market-determined exchange rate from 1993, with the RBI intervening to reduce volatility, a managed float.

Lessons

Devaluation alone doesn’t fix problems; it needs complementary reforms.
Flexible exchange rates reduce the need for sudden big devaluations.
Foreign exchange reserves provide a buffer.

The gold pledge

In 1991, India airlifted gold to London as collateral for loans to avoid default. The humiliation spurred reforms, including devaluation and opening the economy.

Thinking devaluation always boosts exports quickly

Its benefits depend on complementary reforms and conditions like harvests and global demand.

Key takeaways

India devalued the rupee by about 57 percent in 1966 amid war and drought.
The 1966 devaluation was unpopular and made governments wary.
In 1991, a balance of payments crisis led to devaluation and reform.
From 1993, the rupee moved to a market-determined managed float.