India’s Forex Reserves cross USD 500 billion: Long history since 1861

On June 5, 2020 India crossed the barrier of USD 500 billion in forex reserves. In Rupee terms it is approx 37.9 lakh crore. This is quite an achievement. Ira Dugal has a fine piece in BQ tracking the journey from 1991 onwards when it was USD 5 billion.

There is a long history behind these numbers before 1991 as well.

After the first war of independence, the British Government took over control of India from East India Company. Until now, multiple currencies and coins circulated in India.  In 1861, Paper Currency Reserve was established to unify the currency. In British India, this new currency or the Victoria series was to be circulated.

British India Issues commence with the Paper Currency Act of 1861 which gave the Government the monopoly of note issue in India. The management of paper currency across the geographical expanse of the Indian sub-continent was a task of considerable proportions. Initially the Presidency Banks were appointed as agents to promote the circulation of these notes in view of their existing infrastructure. The Act of 1861 authorised the Presidency Banks to enter into agreements with the Secretary of State for becoming agents for the issue, payment and exchange of promissory notes of the Government of India. The problem of redemption of these notes over vast expanses of the Indian sub-continent led to the concept of ‘Currency Circles’, where these notes were legal tender.

These Currency Circles increased in number as the Government progressively took over the work. The agency agreements with the Presidency Banks were finally terminated in 1867. The Management of Paper Currency was subsequently, in turn, entrusted to the Mint Masters, the Accountant Generals and the Controller of Currency.

The PCR was backed by a reserve.

  • From 1861-1898, reserve mainly comprised Silver and Rupee Securities.
  • In 1898, Gold starts becoming part of the reserve.
  • In 1905, change in the Act allowed inclusion of securities of the United Kingdom of Great Britain and Ireland. The London branch of the Paper Currency Reserve was formally opened in 1905–06 and part of the reserves was held there. So, from 1905 onwards we started having foreign securities. These securities along with Gold, IMF’s SDR and Reserves with IMF comprise today’s forex reserve.
  • The PCR grew from  3.69 crore in 1861 to 186.1 crore in 1935. The break up was as follows:
In Rs crore in %
Total PCR 186.1 100%
Total Coin and Bullion 131.92 71%
Gold Coin and Bullion 41.55 22%
Silver Coin 77.25 42%
Silver bullion 13.12 7%
Total Securities 54.18 29%
Rupee Securities In India 35.9 19%
Sterling Securities in England 18.28 10%

In 1935, this PCR was transferred to RBI. RBI divided its balance sheet into two departments like that of Bank of England: Issue and Banking. The Issue was to deal with currency in circulation and Banking with other functions such as banker to Government and banks.

The foreign securities and Gold were kept in both issue and banking departments. In 1935, these three comprised approx 122 crores. Today this figure has increased to 37.9 lakh crore!


One Response to “India’s Forex Reserves cross USD 500 billion: Long history since 1861”

  1. India’s Foreign exchange Reserves cross USD 500 billion: Lengthy historical past since 1861 – News Corner Says:

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