UPSC Prelims 2026Question 2Modern History

The artificially fixed rupee-sterling exchange rate prescribed by the Hilton-Young Commission (1926) was adopted by the British Government for which one of the following reasons ?

Options

(a)Aiding the flow of remittances from India and maintaining India’s creditworthiness
(b)Providing support to Indian importers
(c)Encouraging export of cotton produce from India
(d)Preventing depreciation of the Rupee in terms of gold

Correct answer: a

Decision rule

For any colonial currency or revenue decision, pick the reason that eases remittances to Britain, not the one that helps Indian traders or exporters.

Explanation

Correct Answer

(a) Aiding the flow of remittances from India and maintaining India’s creditworthiness

Explanation of the Correct Answer

The Hilton-Young Commission, officially called the Royal Commission on Indian Currency and Finance, was appointed to examine India’s currency and financial system.
In 1926, it recommended fixing the rupee-sterling exchange rate at 1 shilling 6 pence per rupee, instead of the earlier/preferred rate of 1 shilling 4 pence.
This artificially high exchange rate benefited the British Government because it made it easier to transfer funds from India to Britain in the form of:
- Home Charges
- pensions of British officials
- interest payments
- dividends and profits of British companies
- other remittances from India to Britain
It also helped maintain India’s creditworthiness in the London money market, which was important for British financial interests.

Therefore, the exchange rate was fixed primarily to serve imperial financial interests, not Indian trade or industry.

Why Other Options Are Incorrect

Option	Verdict	Explanation
(a) Aiding the flow of remittances from India and maintaining India’s creditworthiness	Correct	A higher rupee value helped British financial transfers from India and preserved India’s credibility in London’s financial markets.
(b) Providing support to Indian importers	Incorrect	A stronger rupee could make imports cheaper, but this was not the main colonial objective behind the fixed rate.
(c) Encouraging export of cotton produce from India	Incorrect	A stronger rupee actually made Indian exports costlier in foreign markets, hurting exporters such as cotton producers.
(d) Preventing depreciation of the Rupee in terms of gold	Incorrect	The Commission did recommend a gold bullion standard, but the political-economic reason for adopting the high rupee-sterling rate was mainly to protect British financial interests and remittances.

Relevant Supplementary Information

Hilton-Young Commission and Rupee-Sterling Exchange Rate

Aspect	Details
Official name	Royal Commission on Indian Currency and Finance
Common name	Hilton-Young Commission
Year	1926
Chairman	Sir Edward Hilton Young
Recommended exchange rate	1 rupee = 1 shilling 6 pence
Indian commercial preference	1 rupee = 1 shilling 4 pence
Currency standard recommended	Gold bullion standard
Major institutional recommendation	Establishment of a central bank, later leading to the Reserve Bank of India
Main beneficiary of high exchange rate	British Government and British financial interests
Main Indian groups affected adversely	Exporters, producers, and sections of Indian industry

Impact of a High Rupee-Sterling Rate

Group / Sector	Effect of High Rupee Value	Reason
British Government	Benefited	Easier remittance of Home Charges and official payments to Britain
British investors	Benefited	Easier transfer of profits, dividends, and interest
Indian exporters	Hurt	Indian goods became costlier abroad
Indian importers	Some benefit	Imports became relatively cheaper
Indian producers	Hurt	Export competitiveness declined
London money market	Benefited	India’s financial credibility and payment capacity were protected

Key Takeaways from the Tables

Hilton-Young Commission = currency and finance commission, not a political or education commission.
It recommended a high rupee-sterling rate of 1s 6d per rupee.
The rate was favourable to British remittances and London financial interests.
Indian exporters and producers generally preferred a lower rate such as 1s 4d.
The Commission is also historically important because it recommended the creation of a central bank, eventually leading to the Reserve Bank of India. The RBI’s own historical chronology records that the Hilton-Young Commission recommended establishing a central bank for India.

Context and Current Relevance

The issue reflects the colonial character of India’s monetary policy, where currency decisions often served imperial financial requirements rather than Indian economic interests.
The debate over 1s 6d vs 1s 4d became part of the larger nationalist critique of colonial economic exploitation.
The Commission also shaped India’s institutional monetary history by recommending a central bank, which later became the Reserve Bank of India.

Table: Important British-Era Currency and Finance Commissions / Developments

Commission / Development	Year	Main Focus	Key Recommendation / Outcome	Historical Significance
Herschell Committee	1893	Indian currency problem	Closure of Indian mints to free coinage of silver	Beginning of shift away from silver standard
Fowler Committee	1898	Currency stabilization	Recommended gold exchange standard and fixed rupee around 1s 4d	Linked Indian currency more firmly to sterling
Chamberlain Commission	1913	Indian currency and finance	Supported continuation of the gold exchange standard	Reflected pre-World War I currency policy
Babington-Smith Committee	1919	Post-war currency instability	Recommended high rupee value around 2s	Proved impractical due to post-war economic instability
Hilton-Young Commission	1926	Currency and finance	Recommended 1 rupee = 1s 6d and creation of a central bank	Led eventually to the establishment of the Reserve Bank of India
Gold Standard and Reserve Bank of India Act	1925	Legal framework for currency stabilization	Provided statutory backing for currency arrangements	Reflected British efforts to stabilize exchange and reserves
Reserve Bank of India Act	1934	Central banking	Provided for the establishment of RBI	RBI began operations in 1935
Reserve Bank of India established	1935	Central bank for India	RBI became banker to government and regulator of currency and credit	Major institutional development in India’s monetary history

Table: Major Rupee-Sterling Exchange Rate Debates

Exchange Rate	Associated With	Who Favoured It	Reason
1 rupee = 1s 4d	Earlier gold exchange standard; Indian commercial preference	Indian exporters, producers, commercial interests	Helped exports by keeping Indian goods more competitive abroad
1 rupee = 1s 6d	Hilton-Young Commission recommendation	British Government and British financial interests	Helped remittances to Britain and maintained India’s creditworthiness
1 rupee = 2s	Babington-Smith Committee recommendation	Sections of British official opinion after World War I	Attempted to restore currency stability at a high rupee value, but was impractical
Lower rupee value	Nationalist and export-oriented criticism	Indian producers and exporters	Favoured Indian trade competitiveness
Higher rupee value	Colonial financial policy	British officials, investors, and creditors	Favoured Home Charges, pensions, interest payments, and sterling remittances

Table: Effects of High vs Low Rupee-Sterling Exchange Rate

Aspect	High Rupee Value	Low Rupee Value
Example	1 rupee = 1s 6d	1 rupee = 1s 4d
Imports into India	Cheaper	Costlier
Exports from India	Costlier for foreign buyers	Cheaper and more competitive
Indian exporters	Hurt	Benefited
Indian importers	Benefited	Hurt
British remittances from India	Benefited	Less favourable
Home Charges	Easier to remit	More burdensome
Indian producers	Often harmed due to weaker export demand	Often benefited through better export competitiveness
Colonial government preference	Generally favoured	Generally resisted
Nationalist economic view	Criticised as pro-British	Seen as more favourable to Indian interests

Table: Related Colonial Economic Concepts

Concept	Meaning	Connection with Rupee-Sterling Debate
Home Charges	Payments made by India to Britain for administrative, military, pension, debt, and other obligations	A high rupee value made these remittances easier for the colonial government
Gold Exchange Standard	Currency system where the rupee was linked to sterling, which was linked to gold	Helped Britain control India’s monetary system without large gold circulation in India
Gold Bullion Standard	A system where currency could be converted into gold bullion, not ordinary gold coins	Recommended by Hilton-Young Commission
Sterling balances	Foreign exchange reserves held in pounds sterling	Reflected India’s financial dependence on Britain
Exchange ratio	The fixed value of rupee in terms of sterling	Central issue in colonial currency policy
Drain of wealth	Transfer of resources from India to Britain without adequate economic return	Exchange-rate policy supported such transfers through remittances
Council Bills	Instruments used by the British to manage trade payments and transfer funds between India and Britain	Part of the broader colonial financial mechanism

Key Takeaways

Point	Explanation
Hilton-Young Commission recommended 1s 6d	This was an artificially high rupee-sterling rate.
High rupee helped Britain	It aided remittances, Home Charges, pensions, interest payments, and profit transfers to Britain.
Indian exporters preferred 1s 4d	A lower rupee value made Indian exports more competitive.
Currency policy was colonial in nature	It prioritized imperial finance over Indian producers and exporters.
Hilton-Young Commission also recommended RBI	Its recommendation contributed to the eventual establishment of the Reserve Bank of India in 1935.
Exchange-rate debates were linked to economic nationalism	Nationalists criticized such policies as part of the colonial drain of wealth.

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