Indian Rupee in the Gulf

Vineet Kumar

For many years the Indian Rupee was the official currency in several areas that were controlled by the British and governed from India; areas such as East Africa, Southern Arabia and the Persian Gulf including Bahrain, Kuwait, Muscat, Qatar, Oman, and the Trucial States (now UAE)

While the Indian rupee was replaced in East Africa by the Rupee of the Government of the East African Protectorate in 1905 (and later by the Florin, and then the Shilling of the East African Currency Board) and again by the Shilling of the East African Currency Board in Southern Arabia in 1951, within the states of the Persian Gulf the Indian rupee was still the official currency in 1959.

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.

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 a 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 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. The Indian government, in consultation with the governments of the states in the Persian Gulf and the Bank of England, decided to address the problem by introducing special currency notes for circulation in the Persian Gulf. The Persian Gulf Rupee (XPGR), issued by the Reserve Bank of India, was created for use in the Persian Gulf to reduce the drain on India's foreign reserves. The Indian Rupee was divisible into 16 Annas, and the Persian Gulf Rupee was divisible into 100 Naye Paise. These notes were introduced in 1959 and became known as 'External Rupees' or 'Gulf Rupees'. The notes were of like the notes being circulated in India except that the notes were of different colours ; they were payable only at Bombay (rather than 'at any office of issue'); and they carried a special serial number prefix of 'Z' over a number.

At the time the 'special' notes were introduced, the Reserve Bank of India realized that, while many notes were being returned from the Gulf States, a great number of Indian rupees were being repatriated from Saudi Arabia as well. The rupees were being taken to Saudi Arabia each year by Haj pilgrims and exchanged for Saudi Arabian riyals. Under arrangements in place with banks in Saudi Arabia, Indian rupees could be repatriated to the Reserve Bank of India in Bombay for conversion into pounds sterling. To ensure that no smuggled rupees could be returned from the Persian Gulf via the Saudi Arabian banks, the Reserve Bank of India introduced two special 'Haj notes' at the same time that the Gulf rupees were introduced. Haj Notes was distinct because it was a restricted legal tender in specific Gulf nations accepting the Indian rupee, like the United Arab Emirates, Qatar, Bahrain, Kuwait, and Oman. These notes were not recognized in India. They were also distinguishable by their colour and were having Serial no ‘ HA’ .The Indian Haj notes were used only during the first year in which the Gulf rupees were introduced.

Once the Gulf rupees had been put into circulation it would become harder for smugglers to purchase gold in the Gulf states with Indian rupees, which were no longer readily accepted by the banks. This would in turn mean that Indian rupees could be taken to Saudi Arabia in the following years, and the need for special Haj notes would no longer be necessary.

Two years after the Gulf rupees had been introduced Kuwait was the first Gulf state to introduce their own currency the Kuwaiti Dinar on 1 April 1961, followed four years later, on 16 October 1965, by Bahrain, the Bahraini Dinar divisible into 1000 Fils.

Meanwhile India had devalued its Rupee on June 6, 1966, which had affected the value of the Gulf Rupee, forcing the states using the Gulf Rupee to introduce their own currency.

Shortly after Bahrain had introduced its own currency in 1965, the Reserve Bank of India announced that they were withdrawing the established facilities for the conversion into sterling of Indian coins repatriated from the Gulf states. On October 16, 1965, the Bahraini Dinar (BHD) replaced the Persian Gulf Rupee at the rate of 1 Bahrain Dinar equal to 10 Persian Gulf Rupees.

Though the currency of Gulf States is Dinar , or Dirhams, old timers, hawkers, shop owners still use the term paise and Rupee as local currency lingo. The Legacy of the Indian Rupee continues in the Gulf.

The views expressed are that of the author only and do not necessarily represent that of www.newsofbahrain.com