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Its all demand and supply. With low interest rates in US, India and other emerging
markets are becoming increasingly attractive as an Investment destination for
US and other countries. As more and more $$'s are coming to India the supply of $$ is
more. That is what is causing the rupee to appreciate. On the flip side many
Indian export companies operating on thin margins are facing the heat.
Current inflation has eroded the value of the rupee \u2014 it buys fewer goods, fewer
services and less of everything. Yet as things stand today, the rupee fetches more
dollar: nearly 13 per cent more than it did just 10 weeks ago. How did this
Since the inflation rate in India is relatively higher than in many other countries
that we trade with, the rupee should have depreciated against other currencies.
Instead, the exchange value of the rupee has risen significantly. Economists
attribute this to a number of factors, but the most immediate and important
reason is that the RBI seems to have suddenly lost its appetite for the dollar.
When the exchange rate of a currency is market-determined, as is the case with
the rupee which is on a free float, supply and demand forces come into play.
There has been plenty of dollar supply in the market. In the past, RBI mopped up
excess dollars to ensure that the value of the rupee did not shoot up beyond
limits, for that would have hurt the country\u2019s exports. In the process, the RBI
kept adding to the country\u2019s foreign exchange reserves which have risen to $200
This process of RBI intervention in the market has a cost. For all the dollars the
RBI buys, it must release equivalent rupees into the system which goes on to
increase money supply in the economy. That was not such a major concern as
long as domestic inflation was benign. But now, faced with the paramount task of containing inflation by all means, the RBI, in the last couple of months or so, has let the rupee gain in strength. With the main dollar buyer thus missing from the market, the rupee has reached its highest level in nine years.
As Goldman Sachs economist Tushar Poddar notes: \u201cThe movement of the rupee is, to a large extent, determined by the interplay of three factors \u2014 the current account deficit, the strength of capital inflows, and RBI intervention to curb volatility\u201d.
Despite a surge in the oil import bill and a 30 per cent growth in overall
merchandise imports; despite a larger number of Indians travelling abroad and
splurging more than $7.6 billion last year; and despite Indian companies
investing large amounts in overseas takeovers, there is just not enough demand
for the dollar that would put pressure on the rupee. Even though the RBI,
through its April 24 monetary policy, has sought to encourage a dollar outflow,
the point is why would anyone take out dollars when high return on assets in
India seems to be attracting a deluge of dollar inflow?
Whenever currency of a country moves up, it\u2019s usually implicit that the
economy of country is doing well. The rupee against dollar has appreciated from
Rs 46 in July 06 levels to 40.50 levels in May 07, an increase of more than 10 %
in last year.
allowing ECB borrowings till 2.0 $billion and FDI increase in various sectors led
to over supply in Indian forex market .Also the crisis in US mortgage sector has
raised concern over working of US economy, Mr. Ben Bernanke has raised
concern of a slowdown the US which led to depreciating US dollar.
On the contrary Rupee has depreciated against Euro and GBP, so it won\u2019t be
prudent to say that the rise in rupee is purely based on growth in economy; it is
also because of short term recession in US.
Now we are a \u201cTrillion dollar economy\u201d surpassing Russia; we are world\u2019s 12th
largest economy. The forex reserves of country are around $ 200 billion (as on
But all is not gloomy here as the \u201cRupee at nine year high\u201d is a sigh of relief for
importers in the country.
The oil marketing companies are already facing the volatility in crude prices
resulting in under recoveries and so the appreciating rupee here comes to their
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