The Indian Rupee-US Dollar Exchange Rate: The Economic Impact of a Strengthening Currency
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ICMR HOME | Case Studies Collection
Case Details:
Case Code : ECON025
Case Length : 21 Pages
Period : 2007
Pub. Date : 2008
Teaching Note :Not Available
Organization : --
Industry : -
Countries : India
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Excerpts
Background Note
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In India, the RBI had always played an active role in the
foreign exchange market. However, since the country faced a severe balance of
payments (BOP) crisis in the early 1990s, there was a greater understanding of
the importance of the rupee-dollar exchange rate on the economy.
With reserves down to only around $ 1 billion in mid-1991, caused partly due to
a fall in exports and also due to a decline in remittances (following the Gulf
war), the country was close to defaulting on its debt repayments.
The Indian government then negotiated with the IMF for SDR of around $ 2 billion to stave off any external debt crisis...
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Reasons Behind the Appreciation of the Rupee in 2006-07
Toward the end of 2006, foreign exchange inflows, especially of dollars,
into India started rising sharply. This put upward pressure on the rupee's
exchange rate against the dollar. India's steady economic growth offered
several opportunities for foreign companies. Between April 2006 and March
2007, FDI of $ 16 billion flowed in to India...
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Effects on The Economy
The rupee's appreciation against the dollar was seen
to be beneficial to the Indian economy in some ways, and detrimental in
other ways. The rise in the value of rupee meant that inflation was
curbed. The inflation rate in India declined from 6.73 percent in
February 2007 to 4.10 percent in August 2007...
Some Perspectives
The 'trilemma' or the 'impossible trinity' as economists sometimes called the management of exchange rate, interest rate, and inflation rate, has always posed problems for central banks the world over; and the RBI was not an exception... |
Outlook
In June, 2007, the Economist Intelligence Unit estimated that for the year 2007,
the rupee's average annual exchange rate against the dollar would be 41.3 (a
13.5 percent real appreciation year on year), and for the year 2008, it would be
40 (6 percent)...
Exhibits
Exhibit I: Trillion Dollar Economies as of 2006
Exhibit II: Indian Rupee-US Dollar Foreign Exchange Rate: August 2006-August
2007
Exhibit III: The Indian Rupee: Background
Exhibit IV: Indian Rupee-US Dollar Foreign Exchange Rate*: 1998-2006
Exhibit V: India's Foreign Exchange Reserves Between 1990-91 And 2005-06
Exhibit VI: Remittances to India in Billions of US Dollars, 1990-1991 to
2005-2006
Exhibit VII: Source Regions of Remittance Flows to India in November 2007
Exhibit VIII: Inflation Rates in India
Exhibit IX: The Exchange Rate of Dollar against Currencies of Some of India's
Export Competitors: August 2006-August 2007
Exhibit X: The Recommendations of the Ministry of Commerce in July, 2007
Exhibit XI: The Exchange Rate of Rupee against some Major Currencies between
January 2007 and August 2007
Exhibit XII: The Measures Taken by the Government
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