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The British pound sterling (GBP, £) is the fourth most traded global currency today, after the US dollar, the euro and the Japanese yen. The Indian rupee, (INR, “Rs”), is not used as frequently in international payments, due in part to the fact that the Reserve Bank of India (RBI) imposes strict limits on outgoing rupee-denominated money transfers. Nonetheless, the currency is used by almost one-fifth of the world’s population and, given the two countries’ colonial links, there is a long history of international money transfers between India and the UK.
Today, both the pound and the rupee are on floating exchange rate arrangements, so their values are set by free-market supply and demand. The pound to rupee (GBP to INR) exchange rate has varied considerably in recent years, but the pound has steadily gained value in the last 50 years.
Even after India gained independence from the UK in 1947, the rupee was kept on a direct peg to the pound for the next two decades. The rupee’s value remained steady until 1971, with the exception of two currency depreciations in 1966 and 1971, which were necessary to bring the INR’s value down to market realities. Maintaining the exchange rate peg to the stronger pound was becoming increasingly untenable for India, as the government struggled to jump start economic growth, while containing rising inflation and public debt levels.
The rupee’s peg was then shifted to the US dollar (USD) at a rate of Rs8.39 over the next four years. While the rupee was roughly on par with the GBP and the USD upon independence, India’s rising trade deficit, inflation pressures and lack of economic competitiveness drove down its value considerably over the following decades.
India eventually moved the rupee to a managed float regime in September 1975. Under this arrangement, the rupee’s value was loosely pegged to a basket of currencies made up of India’s primary trade partners, and the government intervened in the foreign exchange market to stabilise the exchange rate. India’s growing trade deficit in the late 1980s and early 1990s made it difficult for the RBI to maintain its exchange rate targets. The rupee was devalued yet again in 1991 as the government worked to manage a major balance of payments crisis.
As a result of the growing trade deficit and resulting balance of payments crisis, the rupee was gradually transitioned to a market-determined exchange rate system in the early 1990s and officially moved to a free-floating exchange rate policy in 1993. This caused its value to drop against most major world currencies, but brought it more in line with its actual market value.
By October 1993, the pound was worth Rs46.50, and it climbed further to remain around Rs50 between September 1994-1995. The pound began to gain more quickly against the rupee in the late 1990s, and increased by nearly 50% in the next three years to reach Rs71.36 by September 1998. Between late 1998 and early 2002, the GBP to INR exchange rate fluctuated more modestly between Rs66 and Rs72, as the British economy grew steadily and India struggled to maintain financial stability. The GBP continued its rise in the mid-2000s, and traded at roughly Rs84 through much of 2004-2008.
In the early stages of the global financial crisis, many analysts expected the worst effects to be contained to North America, and the pound retained its value against most global currencies, particularly the USD. However, as the effects of the economic downturn quickly spread to UK financial centres and the rest of Europe, the pound dropped sharply. From an exchange rate of Rs84.21 in October 2008, the pound then lost more than 15% of its value against the rupee in just four months, plunging to a near seven-year low of Rs71.11 by January 2009.
As the UK economy failed to make any significant gains in the immediate aftermath of the crisis, the pound continued to decline in the coming years, falling to a nine-year low of Rs67.15 by May 2010. The pound held relatively steady at a value of roughly Rs70 for the next year through July 2011.
After this point, the pound has rapidly regained value against the rupee. The British economy began to see solid improvement in 2011 and 2012, despite continued uncertainty over high public debt levels. Nonetheless, the UK managed to escape much of the stagnation seen in the eurozone, which was weighed down by drastically different performances among its various economies. The GBP exchange rate remained above Rs85 in the second half of 2012.
As the UK recovered, India was hit by a shared crisis among emerging economies. The US Federal Reserve Board (Fed), announced in May 2013 that it planned to begin tapering its purchases of sovereign bonds - a programme known as “quantitative easing” that had helped to buoy emerging markets throughout the worst of the global economic downturn. As investors began to turn their attention to the US and the UK, capital fled from riskier markets such as India, Brazil, Turkey and Indonesia - causes these countries’ currencies to plummet.
The pound’s value shot up more than 20% in the next five months, from Rs83.65 in May 2013 to Rs100.96 in September - passing the symbolic 100-rupee mark for the first time in the history of this currency pair. The pound rose to an all-time high of Rs102.55 in February 2014, and its value held at or above Rs100 until September. The pound’s value dropped slightly to Rs94.36 in February 2015 on the back of proposed economic reforms from India’s new government. However, analysts expect the pound to continue to grow against most major currencies in 2015, keeping the GBP to INR exchange rate heavily weighted in its favour.
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