The Oil Rupee
As late as 1959, the Indian Rupee was the medium of exchange in Kuwait, Bahrain, the Trucial States (now UAE) and parts of Oman. But this was not exactly good news for India’s monetary policy makers. Peter Symes has this account of India’s ‘Gulf’ Rupees.
The rupees that were circulating in the Persian Gulf had been bought by the various Gulf states from the Reserve Bank of India and were no liability to the Reserve Bank, as it held the sterling reserves by which the rupees had originally been purchased. However, Indian rupees were being smuggled from India to the states of the Persian Gulf, where they were readily accepted in exchange for gold, which was in turn smuggled back into India. Gold has long been a medium of exchange in India and it was estimated in 1959 that the total amount of gold in private hands in India was about $US1.75 to 2 billion–roughly two thirds of the value of paper money in circulation. While it was legal to own and to trade in gold within India, it was illegal to import or export gold.
As the smuggled rupees, used to purchase the gold, were excess to the currency required for circulation within the Gulf states, they were repatriated to India through official channels and exchanged for pounds sterling. This meant that India was paying for the illegal importation of gold through its reserves of foreign exchange. For while the Reserve Bank held sterling reserves with which the Gulf states had purchased the rupees used for circulation, the smuggled rupees being repatriated were a liability for which no foreign reserves had been allocated.
While the smuggling had been a problem for many years, in 1957 and 1958 the problem rose to alarming proportions and took a large toll on India’s reserves of foreign exchange. It was estimated that, in the eight years to 1956, $US245.7 million worth of rupees were smuggled out of India to the Persian Gulf, and in 1957 India paid out $US92.4 million in sterling to banks in the Persian Gulf. [Peter Symes]