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Rising Rupee Essay

5493 words - 22 pages

Index

Introduction………………………………..………………03
Current scenario………………………………….……...04
Causes ……………………………………………………..…05
Impact...………..……………………………….……………09
Corrective measures………………….…………….….15
Future…………………………………………………………17
Conclusion…………………………………………………..18
Bibliography……………………..………………………...19

INTRODUCTION

The recent sudden and fast appreciation of the rupee has many economists, bankers, and treasury managers running from pillar to post to find answers. They want answers to, first, what happened, then why and how and, lastly, what will happen down the road.
Currencies appreciate when the economies ...view middle of the document...

The heartburn on the rupee's appreciation against the dollar is due to the fact that most of India's external trade is invoiced in dollars and any change in the dollar's rupee value has a disproportionate effect on the various stakeholders in the rupee's external value such as importers, exporters, borrowers, lenders and consumers of imported goods.
The Indian consumer is a big beneficiary too, as costs of a host of imported goods — from petro products to electronic, electrical and consumer items — would be higher but for the rupee's appreciation. The rupee's appreciation is one of the reasons to lower the inflation rate.
However, as the rupee continues to rise, the demands for intervention are likely to become shriller. An artificially managed depreciation would result in higher cost to Indian importers and to the consumer in exchange for a probable boost to exports.

CURRENT SCENARIO

Whenever currency of a country moves up, it’s usually implicit that the economy of country is doing well. The rupee against dollar has appreciated from Rs 46 in July 06 levels to 39.50 levels in October 07, an increase of more than 10 % in last year. The fig shows the Rupee appreciation within different periods. The fig shows the trend of rupee with different periods.

US dollar is the predominant currency in which billing for exports are done. 73% of the Exporters make exclusive use of the dollars for conducting export transactions.

1 Week ( 0.1% ) 2 Weeks ( -0.87% ) 1 Month ( -2.97% )

3 Months ( -2.48% ) 6 Months ( -5.85% ) 1 Year ( -13.14% )

This ‘vehicle currency’ status of the dollar is further reinforced as the remaining 27% of the exporters use a combination of USD and other foreign currencies for billing exports. It is to be noted that in case of those exporters who use more than one foreign currency, the dollar on average accounts for nearly 75% of the total billing portfolio.

The present heavy dependence on the dollar is reflected by the exporters’ concern with regard to the situation at hand. A significant aspect of the billing practice of exporters is that none of the exporters have any inbuilt protective clause in their contracts, which could perhaps have saved them from unpredictable change in (Rs-USD) exchange rate.

CAUSES

When it comes down to the reasons for the appreciation, many put forward. There have been accusations that the Reserve Bank of India is pandering to the Finance Ministry by letting the rupee appreciate so as to bring down inflation. Then, there are more reasonable explanations that the appreciation is because of the increased demand for rupee, a result of massive capital inflows.

3.1 Capital inflows
The currency of any country is set on the basis of demand and supply, much the same as any commodity such as oil. All major currencies are set based on trading in exchanges and the higher the demand for a commodity, the stronger it becomes and vice-versa.
However, some...

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