Advantage Of Appreciating Rupee

In the middle of 2002, a US dollar was equivalent to 49 rupees. Comes May 2007 and dollar comes down to 40.50 rupees. In the last five years rupee is constantly getting appreciated. In the past initially due to the devaluation and later due to so called forces of the market were making the rupee weak. We must keep in mind that though the rupee has appreciated vis-a-vis all other international currencies, but it has appreciated more with respect to US dollar.
How could this happen?
In the past our balance of payment has always been in deficit, due to which there has always been a shortage of foreign currency. This meant more demand and less supply of dollars, which was making the rupee weak. We had to shed more and more rupees for every dollar. In the last few years our balance of payment has turned into surplus. Unprecedented increase in IT exports, remittances from Non Resident Indians and capital inflow (FDI and FII) have been the main reasons for balance of payment turning into surplus. As a result of all this our foreign exchange reserves started overflowing and reached at 200 billion dollars. Appreciation in rupee vis-a-vis dollars was an obvious outcome of fast rising foreign exchange reserves and thereby increased supply of dollars.
RBIs response
As and when there is an upheavals (upward or downward) in the value of currency, the central bank of the economy tries to dampen the same. Reserve Bank of India also intervened to restrict the tendency of fast appreciation of rupee. Rupee would have appreciated at a much faster pace vis-a-vis dollar in the absence of such intervention by the RBI. In the changed scenario everybody would accept that this strengthening of rupee is obvious and sustainable.
Adverse impact on exports?
Appreciation of rupee has a mixed impact on different sectors of the economy. Exporters are worried by strengthening of rupee. It is obvious because they would be getting much less in terms of rupees from the dollars which they earn from exports. For example, for every 100 US dollars, if they were getting 4500 rupees at the exchange rate of 45 rupees per dollar, would now be getting only rupees 4000. They plead that this would reduce their competitiveness in the international market.
But opposed to this some experts opine that fast rising IT exports and profitibility of software industry indicates that this sector is competitive enough. This factor also has played an important role in strengthening of the rupee. Whenever industries having significant export capacities become more competitive and profitable, currency of the country gets strengthened. In the past strong US dollars, Pounds and Yen reflected the strong industrial potentials of these nations. These experts believe that since strengthening of rupee is due to strengthening of our export industries, it is not expected to bring any adverse impact on our exports.
Imports would become cheaper
Appreciation of rupee would make imports cheaper and as such it would be cheaper to buy goods from abroad. Petrol should be cheap and so would be gold. Food items which are scarce in the country like pulses, edible oil etc. would get cheaper. All this may send a negative impact on agriculture and industry in the country, for which we may have to make fiscal adjustments.
How to take the benefit of appreciating rupee
First of all those who feel appreciating rupee is a curse should change their opinion. Our commerce minister says that strengthening rupee would send a negative impact on exports. When he says so, he seems to be echoing the historical arguement in favour of devaluation of rupee. Exporter had always argued that more and more of devaluation of rupee is the only way to increase exports. Accepting such arguements rupee was devalued in 1966 and later in 1983-84. Since then rupee has depreciated from rupees 7.80 to in 1983 to rupees 49 by mid 2002. But despite depreciating rupee the rate of growth of our exports has always been less than the rate of growth of our imports. If we think in terms of economic principles, under such circumstances appreciation of rupee rather than depreciation of rupee is the only way to reduce our trade deficit. More important is the fact that recent appreciation of rupee is not due to government's intervention but due to forces of the market. Supporters of globalisation have always been in favour of free market forces. Why are they arguing for restricting this tendency through RBI's intervention is beyond comprehension.
Government can take advantage of appreciating rupee
Due to appreciating rupee people, all over the globe, are getting attracted to this currency. It is obvious that now since dollar is depreciating vis-a-vis rupee people would prefer to keep rupees instead of dollars. Under such circumstances government is working fast on a scheme to issue rupee dominated international debt. In the past official debt as well as commercial borrowings were both repayable in terms of dollars. Not only government can take the benefit of borrowing at cheap rate of interest, even Indian companies can also borrow internationally at cheap rate of interest by issuing rupee dominated debt. The proposal has been mooted by the Department of Economic Affairs, Ministry of Finance and is being discussed by policy makers at a higher level. There are many other advantages of issuing rupee dominated debt. One, there would be not any unwarranted expansion of money supply despite borrowings from abroad. Two, there would not be any currency related risk because loan would be repayable in rupees. Three, there would not be any risk of large scale flight of capital in the event of fast upheavals in exchange rates. Infact now the risk of upheavels in the exchange rates would be borne by foreign investors. Four, government companies and private companies may now have the facility to borrow at a lower rate of interest and as such this would help us in keeping the rate of interest low in the economy. Global rating agency Standard and Poors have increased India's sovereign credit rating to investment grade (BBB-) from speculative rate (BB+). Experts feel that due to this improved rating the country has become attractive to a range of global investors. This would help the government to raise debt at highly competitive rates.