Colonial Currency as Imperial Finance: Evidence on India’s Rupee-Sterling Exchange Rate, 1920-1925

The exchange rate management of the Indian rupee under British rule is central to understanding the financial architecture of empire. Although India is often described as a “monetary shock absorber” within the Sterling Area, the specific objectives of colonial exchange rate policy remain contested. This paper re-examines the period from 1920 to 1925, when the rupee briefly operated under a managed float, employing an autoregressive distributed lag (ARDL) bounds-testing approach to analyze the long-run relationship between the rupee–sterling exchange rate and India’s import and export price indices. Using monthly data reconstructed by Balachandran (1990) [2], the results reveal no evidence of cointegration between the exchange rate and export prices, but a clear and statistically significant long-run relationship with import prices. A stronger rupee is associated with lower import prices, and the import-price model features a stable error-correction adjustment. These findings suggest that British policymakers prioritized stabilizing sterling-denominated remittances—such as the Home Charges over enhancing India’s export competitiveness. Instead of serving trade objectives, exchange rate policy functioned as a macro-financial instrument designed to protect imperial liquidity and secure predictable revenue flows to London.