5.2. Major Foreign Exchange Crisis

In the year 1991, Indian economy faced an acute shortage of foreign exchange. Several factors were responsible for this crisis.

First, the immediate cause for the foreign exchange crisis was the war between the Gulf countries of Iraq and Kuwait. This pushed oil prices and the oil import bill went up substantially.

Second, India’s external debt had increased over time. The burden of interest and repayment of old debts was very large. Fresh debts were being denied by the international institutions such as International Monetary Fund (IMF) and the World Bank as well as other commercial lenders.

Third, foreign exchange in the form of NRI deposits was being withdrawn very rapidly because of the political instability and uncertainty at home.

Finally, the growth in imports had always been far more than the growth in exports. India had to, therefore, depend on foreign loans. Hence, foreign debt was always on the rise. Very soon, the foreign exchange crisis took a serious turn. Between January 1991 and June 1991, India faced a situation in which it had foreign exchange just enough to meet the import needs of only about three weeks. India was almost on the edge of defaulting on its foreign lenders’ claims. As a result, the foreign exchange reserves with the Reserve Bank of India almost dried up.