The courageous devaluation of the Rupee by the PV Narasimha Rao government in 1991--that changed the course of India's financial policy-making-was ordered by a hand-written note from the then finance minister Manmohan Singh which was approved by Prime Minister Narasimha Rao on the spot without taking the Union Cabinet into confidence. Singh said this at the launch of his book 'Changing India'-a 6-volume collection of his speeches and writings.
Singh said he was able to persuade Rao to skip taking the decision to the Cabinet fearing it would not have passed. "I still have that handwritten note," said Singh.
Until then, India had a fixed exchange rate under which the Rupee was tied to a basket of currencies of India's biggest trading countries. However, the country faced a serious economic crisis in end-1990 because of high interest payments and higher imports growth than export growth. India ran consistent current account deficits, inflation was high and fiscal deficit widened to over 8 per cent of GDP.
As a result, India's forex reserves had dipped to $1.2 billion, barely enough to finance 2 weeks of imports once the Gulf War resulted in high crude prices which ballooned India's import bill. A devaluation of the Rupee had become essential to avert a financial crisis, Manmohan had told Prime Minister Rao. India finally devalued the Rupee by nearly 19 per cent in July, 1991.
The devaluation shock was originally planned to be a two-stage process. The first stage was a minor devaluation to gauge the political and social reaction. The second dose was a heavier dose to get the Rupee closer to its real value. The second dose nearly didn't happen, Singh revealed.
Rao was initially opposed to the devaluation fearing political risks. More importantly, doing it in two stages, but he finally agreed.
After the first round of devaluation, the second dose was to be announced on July 5, 1991. That morning, Rao developed cold feet and asked Singh to cancel the second round. Singh tried to reason with Rao but once the prime minister insisted he decided to call the then deputy governor C Rangarajan to instruct him to cancel the plan. The call was placed at 9.30 am.
When Singh informed Rangarajan about Rao's wish, Rangarajan informed Singh that the devaluation had already been carried out half hour prior at 9 am. Singh was relieved but obviously informed Rao less enthusiastically, says Jairam Ramesh in his book 'To The Brink And Back : India's 1991 Story'.