The Indian Rupee strengthened against Dollar. Earlier a steep surge in the value of Indian currency was observed before the US employment report. This time it has strengthened after the Reserve Bank of India in its Monetary Policy Review cut policy rates by 25 basis points.
The Causal Factors
The Indian rupee has been appreciating for a while. So far in the present year, rupee has shown an strengthened by 6.64%. This is being attributed to large portfolio inflows into the country attracted by the low current account deficit, low inflation, growth prospects and political stability. The latest appreciation of rupee in being attributed to the selling of large amounts currency by foreign bank and weakening of the US dollar. Usually, a cut in repo rate results in weakening of currency but this new peaking of rupee comes despite the repo cut of RBI.
Impact Of Rupee Strengthening
Currently, the 10-year Indian government bond is yielding 6.43%, sharply higher than 2.243% offered in the US. When rupee strengthen it becomes cheaper to acquire dollars. As a result, export prices rise and a fall is witnessed in imports. Important export oriented sectors of India like Information Technology and Pharmaceuticals will witness fall in revenue as export prices rise. As India depends heavily on this sector of revenue and employment generation, a further increase in export prices may be detrimental for this sector and thereby the economy. On the import side, a fall in price will directly reduce our import bill; it also enables us to import more. For instance, this year in June when India was witnessing a shortage in sugar at domestic level a appreciating rupee permitted India to import more sugar. On the other hand, strengthening rupee is posing as a challenge in sector like Textiles as currency changes are favoring nations like China which are competing with India at global level in textiles. Furthermore, a lower import bill will enable further reduce are current account deficit.
Due to “better prospects” of economic growth a staggering $4 billion have been pumped into the domestic capital market in July by overseas investors primarily. All in all, appreciation of rupee has acted in favor the economy’s growth. Even as experts claim that further strengthening of rupee would not be favorable for the exporters, it is believed that it will assist India in reclaiming its position as the fastest growing economy in the world.