The Indian Rupee-US Dollar Exchange Rate: The Economic Impact of a Strengthening Currency

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Introduction Contd...

Although India had been witnessing strong dollar inflows for some time, the rupee had not appreciated as steeply as it did between September 2006 and July 2007 mainly because on earlier occasions, strong dollar inflows into India usually saw the Reserve Bank of India (RBI)9, India's central bank, intervene in the foreign exchange market and purchase excess dollars so as to minimize volatility in the value of the rupee. This time around, the RBI chose not to intervene, in order to keep domestic inflation, which had been hovering around 6 percent in early 2007, in check.

While the RBI and the finance ministry were able to tame the inflation rate (inflation fell to 3.52% in August, 2007), the rupee's appreciation affected Indian exporters as Indian goods became more expensive for foreign buyers.

Information technology (IT) and textiles industries were particularly hard-hit, as they were the most dependent on the US.

Leather, sugar, and plantation crops were some of the other sectors that were starting to lose competitiveness. The Indian Micro, Small and Medium Enterprises (MSMEs) were also affected. It was feared that falling export competitiveness would cause substantial job losses...

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9] The RBI was established on April 1, 1935. Initially a shareholders' bank, the RBI's functions included regulating the issue of currency notes, maintaining reserves to ensure monetary stability, and operating the credit and currency system of the country.