The Rupee: A Short History of India's Currency

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The rupee takes its name from the Sanskrit rupya, meaning wrought or stamped silver, and it takes its shape from a sixteenth century administrative reform. Sher Shah Suri, the Afghan ruler who displaced the Mughal emperor Humayun for five years in the 1540s, issued a standardised silver coin of roughly eleven and a half grams that he called the rupiya, along with a copper coin called the dam and a gold mohur. The Mughals restored to power kept the system, Akbar refined it, and for the next three centuries the subcontinent ran on a silver standard whose basic unit had a stable, well understood weight. That continuity is unusual in monetary history and it is why the word rupee still names the currency of India, Pakistan, Sri Lanka, Nepal, Mauritius, the Seychelles and Indonesia in a variant form.

The East India Company issued its own coin from each of the presidency towns of Calcutta, Bombay and Madras, so a merchant moving goods across India dealt with several rupees at once, each with slightly different fineness. The Coinage Act of 1835 imposed a single uniform silver rupee across British India, and the paper note followed in the second half of the century. The currency remained silver based just as the industrial world was moving onto gold, and the consequence was painful. From the 1870s the world price of silver fell heavily, and because the rupee was a silver coin its value against the pound sterling fell with it, driving up the cost in rupees of the payments the Indian government had to make in London. In 1893 the mints were closed to the free coinage of silver for private account, and by the turn of the century the rupee had been fixed against sterling at one shilling and fourpence, or fifteen rupees to the pound, on what was known as a gold exchange standard. India held reserves in London rather than gold at home, an arrangement Indian nationalists attacked for decades as a device that served British rather than Indian interests.

A central bank and a new republic

The demand for an Indian central bank ran through the same argument. After a royal commission and years of drafting, the Reserve Bank of India Act was passed in 1934 and the Reserve Bank began operations on the first of April 1935, initially as a privately shareholder owned institution. It was nationalised in 1949, two years after independence, and became the note issuing authority and monetary regulator for the new republic. Two decisions of the following decade still shape everyday life. In 1957 the rupee was decimalised: the old division into sixteen annas, sixty four pice and one hundred and ninety two pies was replaced by one hundred paise, initially called naye paise, or new paise, to avoid confusion during the transition. And in the 1950s and 1960s the Reserve Bank also issued a separate Gulf rupee for circulation in the Persian Gulf sheikhdoms, so that gold smuggling against Indian reserves could be contained; those states issued their own currencies after India devalued in 1966.

Devaluation is the recurring event in the modern history of the currency. India followed sterling down in 1949. In June 1966, under pressure from war, drought and a balance of payments crisis, the government devalued sharply, moving the rupee from about four and three quarter rupees to the United States dollar to seven and a half. The decision was deeply unpopular at home, was widely seen as imposed by foreign donors, and helped set Indian policy against exchange rate adjustment for a generation. The next great turn came in 1991, when foreign exchange reserves fell to a few weeks of imports and the government pledged gold to raise short term credit. The Reserve Bank devalued in two steps in the first week of July 1991, then moved through a dual exchange rate arrangement in 1992 to a unified, market determined rate in 1993 and to current account convertibility in 1994 under Article VIII of the International Monetary Fund agreement.

The rupee today

India now runs a managed float. The rate is set in the market but the Reserve Bank intervenes to smooth volatility rather than to defend a particular level, and it holds one of the largest stocks of foreign exchange reserves in the world for that purpose. The capital account is only partly open: foreign portfolio investors and direct investors operate under defined routes, and Indian residents may take money abroad only within annual limits. This partial opening is deliberate and is usually credited with insulating India from the worst of the 1997 Asian crisis, though critics argue it also raises the cost of capital for Indian firms.

Two recent episodes gave the currency an unusually public profile. The rupee sign, the character that now appears on price tags and keyboards, was adopted in 2010 after a national design competition; the winning design, by a scholar at the Indian Institute of Technology Guwahati, combines the Devanagari letter ra with the Latin R and adds two horizontal strokes said to evoke the tricolour and the idea of balance. Then, on the eighth of November 2016, the government announced with a few hours of notice that five hundred and one thousand rupee notes would cease to be legal tender, a measure known as demonetisation that removed the large majority of currency by value from circulation overnight. Its stated aims were to strike at undeclared wealth, counterfeiting and terror financing. Its effects remain genuinely disputed: almost all of the withdrawn notes were eventually returned to the banking system, which undercuts the claim that large stocks of illicit cash were extinguished, while supporters point to a lasting acceleration in digital payments and in the tax base.

That acceleration is real whatever one concludes about its cause. The Unified Payments Interface, launched by the National Payments Corporation of India in 2016, made instant bank to bank transfers free and near universal, and India now processes more real time retail payment transactions than any other country. The Reserve Bank has been piloting a digital rupee, a central bank digital currency, in both wholesale and retail forms since late 2022. A coin first standardised in the 1540s has proved unusually durable in its name, and unusually adaptable in its form.

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