Movement of the Rupee since 1991 During the second half of 1970 a current account surplus occurred. That was a period of import trading strategy and India followed a closed economy model. During 1980 the current account deficit started to increase resulting in a balance of payments (BOP) crisis in 1991. During the 1991 Union Budget the Indian rupee was devalued and the Indian government opened up its economy. Due to this, numerous reforms were liberalized and the exchange rate of the economy changed from fixed to floating. Therefore, it was necessary to analyze the current account and also the movement of the rupee from 1991 onwards. India has always faced a current account deficit except the early 2000s. The deficit had been financed through capital flows and mostly the capital flows were higher than the current account deficit resulting in a balance of payments surplus. payments. The surplus led to an increase in foreign exchange reserves from $5.8 billion in 90-91 to $304.8 billion in 2010-11 (Figure 2). In 90-91, gold contributed about 60% of foreign exchange reserves and foreign exchange assets accounted for about 38%. This percentage transformed to 1.5% and 90% respectively in 2011-2012. Figure 1: Balance of Payments Figure 2: Forex Reserve In the following table we can see that during the period 1990-2000 there was a surplus in the balance of payments of about $4.1 billion and it increased to about $20 billion in 2000. During 2000-05 and 2005-11 we can see a sharp decline and sudden increase in both capital account surplus and current account deficit respectively. After 2004 the balance of payments was declining and had become a matter of concern. There was an increase in Forex reserves mainly in the period 2005-2011. Table 1: Balance of Payments Looking at the movement of Rupee in the figure below one can clearly interpret and see that Rupee has been devaluing since 1991. Figure 3 illustrates the Movement of Rupee against other major currencies. The best way to understand the movement of the rupee is to monitor the real effective exchange rate. The real effective exchange rate (REER) is made up of the basket of currencies against which a country trades and is adjusted for inflation. An increase in the index indicates an appreciation of the currency relative to the basket, while a decrease indicates a depreciation.