Gulf Rupee - Legislature

Legislature

The following extract from the Reserve Bank of India Bulletin, May 1959, explains the measures taken by the Reserve Bank of India:

The Reserve Bank of India (Amendment) Act 1959, providing the issue of special notes of the Reserve Bank and the Government of India (one rupee notes), which are intended for circulation in certain territories outside India, was passed by the Lok Sabha on April 29, 1959 and the Rajya Sabha on April 30 and received the President's assent on May 1, 1959. The Indian rupee has been serving as the traditional medium of exchange in the Persian Gulf States of Kuwait, Bahrain, Qatar, the Trucial States and in parts of Muscat, for a long time, and by custom the Government of India and the Reserve Bank of India have been providing the currency for this circulation. Facilities have been provided to banks operating in the Persian Gulf States to exchange Indian currency notes collected by them for sterling. However, this currency arrangement has, in the last few years, facilitated the conversion into sterling of large amounts of Indian notes smuggled out, representing proceeds of smuggled imports of gold and other commodities into India, which entailed a substantial drain on India's foreign exchange reserves. The notes were transferred through various channels to banks in the Persian Gulf area, who tendered them to the Reserve Bank for redemption into sterling. There was no means of distinguishing currency taken out for legitimate trade transactions from currency taken out illegally for financing unauthorised transactions, chiefly gold imports. Until 1956, the volume of smuggling activity and the redemption of Indian currency into sterling was not large, but in 1957 and 1958, the return of notes and the resulting loss of foreign exchange assumed large proportions. In recent months, smuggling operations appeared to have subsided somewhat, but it was felt that if the present arrangement continued, there would be no safeguard against a resumption of the drain of foreign exchange arising out of increased smuggling. For these reasons, the Government of India decided to introduce a special series of India notes in replacement of the India notes now in circulation in the area. The amendment to the Reserve Bank of India Act was necessary, since the existing provisions did not provide for the issue of special notes which are not legal tender in India. The new series of special notes will be identical with the existing series except for their colour and for a slight modification of the legend on the obverse, indicating they are payable "at the office of Issue at Bombay" instead of "at any office of issue" as in the case of the existing notes. The special issue will be in the denominations of Rs. 5, Rs. 10 and Rs. 100, besides one rupee notes of the Government of India. There will be no change in the value of the rupee and the special notes will be as much a liability of the Reserve Bank of India and the Government of India as the notes issued for circulation in India. The special notes will be freely convertible into Indian rupees. They will also be freely convertible into sterling under the existing procedure, under which Persian Gulf banks presented Indian currency notes in their possession to the Reserve Bank for redemption in sterling. The special notes will not be legal tender in India. There will also be no restriction on Indian rupee notes being brought into India by travellers. The initial stage of the operations is the exchange of existing Indian currency into the new notes. For this, a period of six weeks from May 11, 1959 to June 21, 1959 has been allowed. The Reserve Bank has provided adequate exchange facilities for the exchange of existing notes into special notes at all the banks functioning in the Persian Gulf States and Muscat. Once the initial exchange is completed, further supplies of special notes will be obtainable by the Persian Gulf banks under the existing arrangements for obtaining notes from India, namely, through payment of sterling. The facilities for the exchange of Indian currency notes into sterling provided prior to the issue of the special notes will be withdrawn with effect from June 22, 1959 and the redemption into sterling will be limited only to special notes issued in exchange for those now in circulation plus future issues against which sterling will be received. The issue of special notes will not involve any additional liability because they replace notes already in circulation, while future issues will not involve any uncovered liability as each rupee will be issued only against equivalent receipt in sterling.