Abstract

In 2007, India experienced rapid appreciation of its currency against the US dollar. The reasons for the appreciation of the rupee were a generally weak dollar in international currency markets and sharp increase in dollar inflows into the country, partly due to India’s increasing attractiveness to foreign investors. Although India had been seeing a steady rise in dollar inflows into the country for quite some time, on earlier occasions, the Reserve Bank of India (RBI) had intervened in the foreign currency market and purchased excess dollars so as to prevent any appreciation in the value of the rupee. Now, the RBI decided not to intervene, mainly to control inflation which was around 6 percent in early 2007. The case discusses the reasons for the appre-ciation of the rupee and its possible impact on the Indian economy. It also discusses the measures taken by the RBI and the government to control rupee appreciation and to try offset the negative impacts of a strong currency on the economy. The case ends with some views on the future movement of the rupee.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the importance of exchange rate management
• Examine the reasons for the rapid appreciation of rupee in 2006-07
• Analyze the impact of rupee appreciation on the economy
• Critically analyze the role of the central bank in the foreign exchange market
• and Assess the possible future movement of the rupee vis-à-vis the US dollar.

Keywords

Indian rupee, US dollar, Rupee-Dollar exchange rate, Impact of a strengthening currency, Foreign Direct Investment, Inflation, External commercial borrowings, Export competitiveness, Exchange rate management