Indian Rupee History: There was a time when the Indian rupee was used not only in India but also in many Gulf countries. Let's explore why those Gulf countries abandoned the rupee.

History of the Indian Rupee

Indian Rupee History: From the 19th century to the mid-20th century, the Indian rupee wasn't confined to India's borders. It was the official and primary currency in several Arab Gulf countries, including Kuwait, Bahrain, Qatar, Oman, and what later became the United Arab Emirates. During British rule, the Indian rupee became the backbone of trade in the Indian Ocean. It was trusted by merchants and supported by the royal power. However, gradually, the Gulf countries abandoned this currency. Let's find out why.

Why was the Indian Rupee used in Arab countries? 

During British colonial rule, India was the economic center of the British Empire east of Suez. The Gulf countries were British protectorates, and the Indian rupee was introduced there through formal treaties. It became a legal tender for trade, salaries, and savings.

The rupee was stable and, in its early years, backed by silver. Furthermore, it was accepted by traders from East Africa to Southeast Asia. For Gulf economies, the rupee was a convenient and reliable option.

gold smuggling 

The rupee's international standing suffered a major setback in the 1950s. India imposed strict controls on gold imports, making gold significantly more expensive domestically. Meanwhile, gold was much cheaper and more readily available in the Gulf countries. Smugglers took advantage of this gap. They took Indian rupees to the Gulf countries and exchanged them for gold. They then smuggled the gold back to India and sold it at a huge profit. The rupees deposited in the Gulf were then deposited in foreign banks, which then sought conversion from the Reserve Bank of India. This illicit trade began depleting India's precious foreign exchange reserves at an alarming rate.

The birth of the Gulf Rupee 

In 1959, India introduced a unique currency called the Gulf Rupee. It looked similar to the Indian Rupee but had a different color. Importantly, this currency was valid only in Gulf countries, making its use illegal in India. This reduced gold smuggling and protected India's reserves.

Devaluation of 1966 

One of the biggest setbacks came in 1966 when India faced a severe economic crisis. The Indian rupee devalued by approximately 57%. Now that the Gulf rupee was pegged to the Indian rupee, its value plummeted overnight. Gulf countries suffered a sudden financial loss. Imports became expensive, the value of savings declined, and confidence in the rupee eroded. Following this, Gulf countries rapidly moved towards establishing their own monetary identities. Kuwait adopted the Kuwaiti dinar in 1961, and Bahrain followed suit in 1965. Qatar and Dubai introduced a joint riyal in 1966, and Oman replaced the Gulf rupee with the Omani riyal in 1970.