The Indian Rupee-US Dollar Exchange Rate: The Economic Impact of a Strengthening Currency
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Case Code: ECON025 Case Length: 21 Pages Period: 2007 Pub Date: 2008 Teaching Note: Not Available |
Price: Rs.400 Organization : - Industry : - Countries : India Themes: Economics, Politics and Business Environment |
Abstract Case Intro 1 Case Intro 2 Excerpts
"The profitability of exporters has been wiped out and constant appreciation is threatening the competitiveness of our product. If we lose the market, aggressive competitors are just sitting on the fence to occupy the market."
- G.K. Gupta, President of the Federation of Indian Export Organizations (FIEO), in October 2007
"The government is concerned over the rapid appreciation of the rupee against the US dollar and the central bank may have to intervene if there is disorderly movement in the exchange rate."
- P Chidambaram, Finance Minister of India, in September, 2007
"The objective of the exchange rate management has been to ensure that the external value of the rupee is realistic and credible as evidenced by a sustainable current account deficit and manageable foreign exchange situation. Subject to this predominant objective, the exchange rate policy is guided by the need to reduce excess volatility, prevent the emergence of destabilizing speculation activities, help maintain adequate level of reserves, and develop an orderly foreign exchange market."
- RBI's Policy in the Foreign Exchange Market
Introduction
In April 2007, on the back of a rising rupee, the Indian economy became a trillion dollar -economy, moving the country into an elite group of nations (Refer Exhibit I for the List of Trillion Dollar Economies). By August 31, 2007, the Indian currency was trading at 40.96 against the dollar, as compared to 46.55 on August 31, 2006, an appreciation of around 12 percent (Refer Exhibit II for Rupee-Dollar Exchange Rate Movement from August 2006 to August 2007). The rise in the value of the rupee was a result of the general weakening of the dollar in international markets, plus India's growing attractiveness to foreign investors.
In 2006-07, India attracted huge capital inflows in terms of foreign direct investment (FDI), and foreign institutional investment (FII). External commercial borrowings (ECB) and non-resident Indian (NRI) deposits and remittances also contributed to the dollar inflow.
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), 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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