Under the British rule, several princely states had the right to issue coins and banknotes, and several of them did so until 1950. The value of this rupee varied from one state to another. The rupee issued by the Government of India was assigned a value, relative to the British pound sterling. The concept of a single currency or Indian rupee, holding the same value, design and structure across the country, developed only after independence.
The Indian rupee was also used extensively in West Asia, East Africa and other parts of the world that were on trade routes to and from India. The rupee was used in Aden and in British Somaliland until 1951, in Iraq from 1917 to 1931, in Kuwait until 1961, in Bahrain until 1966, in Qatar and the Trucial Coast until 1967 and in the Sultanate of Muscat and Oman until 1966.
After independence, rupee was made divisible into 100 naye paise between 1957-64, and 100 paise beginning in 1964. The Treasury of the Government of India issued banknotes until 1943. The Reserve Bank of India was set up in April 1, 1935 and took over responsibility for issuing banknotes after 1943.
The Haj Rupee and Persian Gulf Rupees were also issued by the Reserve Bank of India till 1965.
The French, Dutch and Portuguese colonies in India, where the Indian rupee value was relative to the parent country's currencies, regularized the rupee only after accession to India in the 50s and 60s.
Design and Style:
After independence, the government brought out the new design Re 1 note in 1949. Initially, it was felt that the King's portrait be replaced by a portrait of Mahatma Gandhi. Eventually, Lion of Asoka, which is also the national emblem, was chosen. The new design of notes were largely along earlier lines. Hindi found a place on the rupee note in 1953, followed by 14 other languages.
The economic crisis in late 1960s led to a reduction in the size of notes in 1967. High denomination notes such as Rs 500, Rs 1,000 Rs. 10,000 were demonetized and subsequently re-introduced in the new millennium.
The "Mahatma Gandhi Series" was introduced in 1996. Prominent new features included a changed watermark, windowed security thread, latent image and intaglio features for the visually handicapped. These features are enhanced and improved continuously to provide more security and prevent fake currency printing.
Currency valuations:
Prior to independence, the Indian currency was pegged against silver. The silver-based rupee, fluctuated according to the value of silver and had a distinct disadvantage while trading against currencies which were based on the gold standard. This was rectified post-independence.
Problems of the 50s and 60s:
India inherited a trade deficit because of its colonial past. Complications of partition further accentuated the problem. Owing to a negative savings rate, the country could not lean on the private corporate sector or public savings. The relatively young economy, struggling with a mounting budget deficit, found an outlet in government bonds which were issues to the Reserve Bank of India to increase money supply. Unfortunately, this increased inflation as well.
Following the Indo-Pak War of 1965, the main sources of foreign aid dried up as the western economies, mainly the US and the UK, sided with Pakistan. India was also told to lift trade restrictions by its major trade partners in the developed world. In addition to high defense spending, because of war conditions, the country also faced its worst drought during the period. This led to a decline in agricultural production and a sharp rise in prices.
At that point, India had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. These currencies were, the US dollar, the UK pound sterling, the Japanese yen, the Deutsche mark and the Italian lira. Its value was determined from time to time, according to change in the relatives values of these currencies vis-à-vis one another and India's trade account with them.
The government had no choice but to effect a currency devaluation. At the end of 1969, the rupee was trading at around 13 British Pence.
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