Slice of history: When India’s reserves were in ‘sterling’ health

It’s the adequacy of our forex reserves that is the hot topic of discussion these days with the central bank announcing measures to increase the reserves pile-up. The import cover of reserves is still enough to finance only eight months’ imports compared to its ability to finance close to 15 months’ imports before the global financial crisis in 2008.

But India’s central bank had to deal with a problem of plenty immediately after independence in 1947. India’s wartime sterling balances amounted to over £1,134 million (Rs 1,512 crore) on the eve of independence.’ Financing commodity imports and capital outflows, making payments to Britain for surplus military stores and pension annuities, and paying the new dominion of Pakistan its share of undivided external financial assets, ate into a major portion of these reserves. But India’s sterling balances were still comfortable at £621 million (Rs 828 crore) at the end of 1949. There was net accretion to the country’s external reserves which lasted until the mid-fifties.

Main problems which Indian policy-makers faced during these years in the external sector may be more aptly described as those of plenty than of want, notes one of the volumes of RBI’s history. The sterling devaluation of September 1949 extinguished nearly a third of its dollar or gold value. Yet, the existing level of exchange reserves then appeared to provide a comfortable cushion for the foreseeable future. The rupee, too, was a stable currency, or as one source described it, the ‘hardest of soft currencies’.