The Rising Rupee

Talking about shocks, one of it is that Indian currency, INR, is at its nine year high level against dollar.

Indian economy right now is going through some kind of overheating. The consumption due to high earning has contributed to increase in prices. Inflation is at 6% whilst the government targeted something around 5%. In a democratic country like India, the 'high' inflation has some political cost as well, so the government surely wants to tame it. The fall out of all this is the appreciation of Indian currency.

Typically the quick measure any government employs to curb inflation is to decrease the amount of currency or soak up the liquidity. This is what Central bank of India (RBI) is trying to do by various means as increasing the Interest rate through CRR hike. There is one added dimension in this story. India is facing record inflow of foreign fund increasing the supply of dollars and making the rupee appreciate. The only way to stop rupee from appreciating is to buy dollars from market, which will release rupee into the market and will increase inflation. Strong rupee also helps in keeping the import cheap, in particular the crude oil cost and decreases inflationary pressures. So for so good, but strong Rupee also hurts exports, so sooner or later the government will have to do something to keep the appreciation of rupee in check.

Feelers are being sent from the government that rupee appreciation will be checked and some steps like allowing the limit for Resident Indians to invest abroad to 100, 000 $ from earlier 50, 000$ is step in that direction. There are also arguments from some quarters that stronger rupee is not going to hurt export much, if other things such as customs duties, etc are reduced. After all, the Rupee which had to be devalued in 1991 has appreciated from Rs 49 to now around Rs 41 per dollar, all this time our exports have increased and so the profit of companies.

In my personal view, government should also look at long term measures to curb inflation by reducing inefficiencies in our economic value chain. There is a lot to be desired in this context. Also, when government has advanced information of supply falling short of demand there is no reason why steps can’t be taken a little earlier? This is true for agricultural commodities like Wheat and Pulses.

None the less, appreciating INR has made my wallet lighter.