Appreciation of Indian Rupee: A Critical Analysis

_____________________________________________________
_
I. Introduction

Indian Economy is a “Trillion dollar economy” surpassing Russia and India is the
world’s 12th largest economy. The forex reserves of country are around $ 200 billion.
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 40.50 levels in May 07, an increase of more than 10 % in 2006. In January-May
2007, the rupee's value in terms of pounds, euros and yen rose by 8%, 6.9% and 11.2%,
respectively. During 2005-06, 86% of Indian exports and 89% of imports were invoiced
in US dollars, according to the Reserve Bank of India. The following Figure shows the
appreciation in Indian Rupee during May 2002 to May 2007.

Figure- 1: Appreciation in the Indian Rupee during 2002-2007

The present strength of the currency, which is now hovering just above the symbolic
Rs40: US$1 Mark is an enviable problem. It suggests that the country's attractiveness to
foreign investors is increasing and signals optimism about the Indian economy more
generally.

1
Objectives and Methodology
The present research is an effort to know what is the impact and reasons for Rupee
Votality and how it can be stablised. The research is based on secondary source of data.

II. Reasons for the Appreciation of the Rupee

1. FDI: India's economic growth has created a large domestic market that offers
promising opportunities for foreign companies. Moreover, the country's rising
competitiveness in many sectors has made it an attractive export base. These factors have
boosted FDI. In 2006-07 FDI amounted to around US$16billion, almost three times the
previous year's figure. More than half of these inflows arrived in the final four months of
the fiscal year (December 2006-March 2007). According to data from the Securities and
Exchange Board of India (SEBI), net FII equity investment returned to positive territory
in late July, about the same time that selling pressure on the rupee started to diminish.
The last time this happened was between December 2005-January 2006, when the rupee
mounted a sharp appreciation – to 43.89 per dollar from 46.24 – within a short span of
two months.

2. External Commercial Borrowings (ECBs): Indian companies have borrowed

enormous amounts of money overseas to finance investments and acquisitions at home
and abroad. This borrowed money has returned to India, boosting capital inflows. India's
balance-of-payments data reveal that inflows through external commercial borrowings
(ECBs) amounted to an enormous US$ 12.1 billion during April-December 2006, a year-
on-year jump of 33%. The flood of borrowed money is likely to grow in 2007. In the first
three months of the year 2007, Indian companies notified the RBI of plans to raise nearly
US$ 10 billion in overseas debt.

3. Foreign Portfolio Inflows: India's booming stock market embodies the confidence of
investors in the country's corporate sector. Foreign portfolio inflows have played a key
role in fuelling this boom. Between 2003-04 and 2006-07, the net annual inflow of funds
by foreign institutional investors (FIIs) averaged US $ 8.1 billion. Trends during the first

2
five months of 2007 indicate that this flood is continuing, with net FII inflows amounting
to US$ 4.6 billion. Another major source of portfolio capital inflows has been overseas
equity issues of Indian companies via global depositary receipts (GDRs) and American
depositary receipts (ADRs). Inflows from GDRs and ADRs amounted to US$ 3.8 billion
in 2006-07, a year-on-year increase of 48%.

4. Investments and Remittances: Indians settled in other countries have also been a
major source of capital inflows, with many non-resident Indians (NRIs) investing large
amounts in special bank accounts. While NRIs' emotional connection to their country of
origin is part of the explanation for this, the attractive interest rates offered on such
deposits also provide a powerful incentive. In 2006-07 NRI deposits amounted to US $
3.8 billion, a 35% increase over the previous year; the outstanding value of NRI deposits
as of end-March 2007 was US $ 39.5 billion. Another large source of foreign-exchange
inflows has been remittances from the huge number of Indians working overseas
temporarily. Such remittances amounted to US $ 19.6 billion in April-December 2006, a
15% year-on-year increase.

5. Oil Prices - Stopped Rising: Owing to India’s high dependence on oil imports,
higher energy prices have been unfriendly toward the rupee. In the last FY 2005-06
(April-March), India’s oil deficit accounted for 81.8% of the country’s total trade deficit.
This, coupled with the return to a current account deficit position, is responsible for the
rupee’s lack of participation in the broad appreciation in Asian currencies over the past
two years. The recent drop in oil prices provides scope for a relief rally in the rupee,
similar to what occurred in the final months of 2005. As oil prices fell by $13/bbl (about
25%) between August 2005-December 2005, the rupee experienced the sharp
appreciation.

6. The Central Bank Needs to Address Inflation: IMF has warned of growing
inflation pressures in India. The Reserve Bank of India (RBI) is looking to contain
headline inflation, as measured by wholesale prices, to between 5.0% and 5.5% for the
financial year to March 2007. Since April, WPI inflation has risen to 4.9% Year-on-year
from 3.7%. The urgency to pre-empt inflation was underscored by the surprise inter-
meeting hike in June, which was followed by another increase in the reserve repo rate to
3
6.00% on July 25. In all, the RBI has hiked rates six times since 2004, and may act again
at its next review in October. This would further widen the rupee’s yield advantage over
its US counterpart to 100bps.

7. The US Dollar is Weak Again: The rupee shares one characteristic with the Japanese
yen. Both currencies have been trading counter to the broad trend of appreciating Asian
currencies in the past couple of years. The times when they respond to their Asian
counterparts tend be periods when currency Markets turn their focus to the need for a
weak dollar to address global imbalances. September is packed with events setting the
stage for a return to the issue of global imbalances. This has the potential to trigger a
dollar sell-off that lasts into the November US mid-term elections.

8. The Indian Rupee is No Longer that Overvalued: On a real effective exchange rate
(REER) basis, the Indian rupee is estimated to have depreciated to 105.04 as at end-
August, down 6.7% from its peak of 112.55 in July 2005. On this count, the rupee is less
overvalued compared to a year ago. This suggests that $/Rupee will be less immune to
pressures to any push for stronger Asian currencies in the coming months.

9. Stronger Fundamentals as Compared to US: India’s has stronger fundamentals vis-

a-vis the US. Some of the positive factors include higher interest rates with a tightening
bias, a strong balance of payments aided by foreign direct investment and an improving
fiscal position that could lead to more upgrades in sovereign debt ratings.

10. US-India Interest Rate Differential Favors the Rupee: An important source of
strength for the Indian rupee comes from India’s relatively high interest rates and
monetary policy bias. The start of the rupee’s ascent in 2006 coincided with the end of
the Federal hike cycle in June 2006, and a more aggressive RBI tightening cycle to
address overheating concerns in the Indian economy. For the record, US Federal Funds
Rate peaked at 5.25% on June 29, 2006. Since then, the RBI has hiked its reverse repo
(borrowing) rate once by 25bps to 6.00% in July 2006. The lifting of the repo (lending)
rate was more aggressive, resulting in four hikes totalling 100bps to 7.75%.

4
11. Sensex Overtook DOW: in 2007 Sensex overtook DOW which resulted in the
favoring of rupee and appreciation in its value.

12. Ratings Upgrades Underscore India’s Economic Strength: The start of the rupee’s
present appreciation path from mid-2006 also coincided with upgrades in the country’s
sovereign ratings into investment grade territory by international ratings agencies. By
January 2007, Standard & Poor’s and Fitch both had a rating of “BBB-” rating for India,
while Moody’s rating was one-notch higher at “Baa2”.

13. Steady Fiscal Deficit: For three straight fiscal years into March 2007, India
maintained a steady fiscal deficit of around 4.0% of GDP. The government is targeting
the fiscal deficit to narrow to 3.3% of GDP for this FY ending March 2008. Federal law
requires India to lower the fiscal deficit to 3.0% of GDP by FY ending March 2009.
Finance Minister P. Chidambaram is optimistic that this will be achieved, a view shared
also by the Organisation for Economic Cooperation and Development (OECD). Figure 2
shows that fiscal deficits are improving continuously and Figure 3 shows that government
revenue is raising at faster rate as compared to government expenditure.
Figure -2: Fiscal Finances are Improving

Fiscal finances are improving

Fiscal deficit as the percentage of GDP

0
2000 2001 2002 2003 2004 2005 2006 2007
-1

-2
Percentage

-3

-4
-4.2 -4.21 -3.98
-5 -4.7 -4.6 -4.6
-5
-6 -5.4
Years

5
 Figure-3: Government Revenue is Rising Much Faster Than the Government
Expenditure.

Government Revenue is rising faster than

expenditure

25
Percentage of GDP

20
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007
Years

Government Expenditure % of GDP Government Revenue % of GDP

14. Healthy Balance of Payments Despite of Trade Deficits: Over the past two-and-a-
half years, India’s merchandise trade deficit more than doubled to 7.5% of GDP in
Quarter 2, 2007 from 3.6% in 2004. Normally, this would have sounded alarm bells. But
thanks to robust surpluses in the invisibles account, the current account deficit remained
narrow at 1.1% of GDP as at Quarter 2, 2007, its lowest level since Quarter 4, 2005.
More importantly, foreign reserves have exceeded total external debt since Quarter 1,
2004. On a 4-quarter rolling basis, the positive reserves-debt gap widened to $56billion in
Quarter 2, 2007, covering 85.5% of the trade deficit. The rapid rise in foreign reserves
implies a balance of payments fuelled by huge inflows - both direct and portfolio - into its
capital accounts.

15. Sustainable FDI: The most important development in 2006 was the emergence of
more sustainable direct investment in 2006. Based on the World Investment Report for
2007 by the United Nations Conference on Trade and Development (UNCTAD), India’s
foreign direct investment (FDI) rankings improved significantly in 2006. India’s inward
FDI performance index improved eight notches to 113 in 2006 from 121 in 2005. Not
only was this the largest one-year jump posted by India, it came on the back of a seven-

6
notch fall in China’s index to 69. FDI grew as a share of gross fixed capital formation,
from 1.9% in 1999- 2000 to 2.6% in 2005 to 8.7% in 2006. Figure 4 shows increase in
FDI in India.
Figure- 4: Sustainable FDI ($ billion) in India

Sustainable Foreign Direct Investment USD bn in

India

20

15
USD bn

10

0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Years

Direct foreign inward investment USD bn

16. Growing Economy: Despite a slowdown in manufacturing, the high gross fixed
capital formation rate of 30.3 per cent and sustained rate of investment give me the
confidence that the annual growth rate will be pretty close to 9 per cent. It is seen that
manufacturing growth slid to 8.6% during July-September as compared to 12.7% during
the second quarter of 2006. Growth in this quarter was thus mainly on account of
agriculture and services. While the agricultural sector and mining in particular improved,
within the service sector only construction has maintained a good growth momentum.
Others, including trade & transport, and financial services recorded lower growth,
partially due to the tight monetary policy. The power sector also failed to show any signs
of improvement. It grew by 7.3% in the second quarter as against 8.1% a year ago. The
sector had grown by 8.3% in the first quarter of this fiscal year.

7
 Table- 1: Sectoral Growth Rates of GDP at Constant (1999-00) Prices (Per cent)

Industry 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Q1 Q2
Agriculture, Forestry & Fishing -7.2 10.0 0.0 6.0 2.7 3.8 3.6
Mining & Quarrying 8.8 3.1 7.5 3.6 4.5 3.2 7.7
Manufacturing 6.8 6.6 8.7 9.1 11.3 11.9 8.6
Electricity, Gas and Water Supply 7.9 12.0 14.1 14.2 9.4 10.7 11.1
Construction
Trade, Hotels, Transport & 9.2 12.1 10.9 10.4 13.0 12.0 11.4
Communication
Financing, Insurance, Real Estate 8.0 5.6 8.7 10.9 11.1 11.0 10.6
and Business Services
Community, Social & Personal 3.9 5.4 7.9 7.7 7.8 7.6 7.8
Services
GDP at Factor Cost 3.8 8.5 7.5 9.0 9.2 9.3 8.9

Source: Central Statistical Organization (CSO)

III. Impact of Rupee Appreciation

A. Positive Impact

1. The IT industry which is strongly lobbying against the appreciation of the rupee,
should realize that its phenomenal growth during the last decade is partly because of
Rupee depreciation too. Rupee depreciated by almost 100 percent against the dollar from
a level of 25 in 1992 to 48 in 2003. Further, Indian economy needs development of
infrastructure which warrants huge investments. A big chunk of the said investments
must come from overseas. The host country’s currency, viz., rupee, must appreciate to
instill confidence into overseas investors.

2. Rupee appreciation is welcomed by those companies with overseas borrowings.

Significant levels of foreign currency – denominated, especially dollar-denominated
loans generate forex gains because of reduced interest payout occasioned by the rising
Rupee. Companies like Ranbaxy and L&T have been able to generate forex gains in the
last quarter because they have substantial exposure to ECBs. , Capital inflows have
reached close to $16 billion during January-November 2007 and around $8.2 billion

8
came in between the Fed rate cut in September and when the Indian govt. imposed curbs
on foreign investors in mid-October.

3. Major Indian stock indices are able to scale new peaks because of recent appreciation
in the Rupee. It has been proved beyond any doubt that there is a very strong correlation
between our stock indices and the parity value of the rupee vis-à-vis major currencies like
the dollar. Analysts point out that during the last year Sensex and Rupee exhibited a
correlation of approximately 80% as against the 30 - 40% exhibited in the last three years
FII’s who have heavily invested in India are reluctant to sell off mainly because of the
appreciating Rupee.

4. Rupee appreciation has helped control inflation. One of the reasons for softening of
inflation during last few weeks may well have been the appreciation of Rupee. Inflation
touched 3.21% for the week ended November 17, 2007, compared to the previous week's
3.01% on the back of higher prices of food products, manufactured items and petroleum
derivatives. Inflation was 5.56% during the corresponding period last year.

B. Negative Impact

1. Loss of Exports: the rupee's appreciation is alarming exporters, as it makes their

products more expensive in overseas Markets and erodes their international
competitiveness. The RBI's deputy governor, Rakesh Mohan, recently referred to the
effects of the rupee's appreciation as a case of "Dutch disease". The term refers to
episodes where large inflows of foreign exchange—usually as a result of the discovery of
natural resources or massive foreign investment—leads to appreciation of the currency,
undermining a country's traditional export industries.

There is already evidence in India of an export downturn in a number of sub-sectoRupee

In the apparel sector—one of India's major export industries--the strong currency has
eaten into the value of exports to the US, which declined by 3.5% year on year in
January-April 2007. During the same period, apparel exports to the US by China, India's
most important competitor, rose by 57%. Moreover, for India the decline Marchks the

9
reversal of a positive trend—apparel exports to the US rose at an average rate of 21% a
year after import quotas were phased out at the beginning of 2005.

There are few industries which are the heavily suffered from havoc (rupee appreciation)
are given with available statistics in Table- 2:

Table -2: Havoc Caused by Rupee Appreciation in Selected Industries

Name of Industry Effect of Rupee Appreciation
Textile and garments 6 lakhs job lost, loss in production capacity-20-25%
Leather 7 lakhs job lost, reduced profitablity-75%
Processed agriculture products Around 20% job lost, cash loss of 15%
Handicrafts 8 lakhs job lost, business loss-$ 7.5 billion
Engineering goods 16 lakhs job lost, cash loss- 12-17%
Chemicals reduction in exports-20-25%
Machine Products reduction in exports-10%

On the merchandise trade front, the government is worried that exports are losing their
competitiveness.

2. Impact on GDP: Although exports account for a relatively small share of the
economy, India's rapid export growth in recent years has been an important catalyst of
economic growth. If the combination of a strong currency and high interest rate
continues, this could clearly have a sharp negative impact on growth. Continuing rupee
appreciation has already affected GDP growth to the extent it has affected exports.Due to
fall in the exports there has been fall in the GDP too which will hinder the growth of
economy. Moreover, the exports are the source of foreign reserves. Decline in exports
will lead to decrease in foreign reserves too.

3. Profits of the Companies will Hit: the companies that will be impacted negatively by
the rupee appreciating include global commodity stocks like Reliance, Hindalco, Tata
Steel and software companies like Satyam, Infosys etc. Global commodity companies
price their products off landed costs. With a decrease in landed costs, profits for these
companies will be hit. Reliance's 70% of revenues come from exports which again would
be hit by the rising rupee and this would further hit their profitability.

10
Software companies are also going to lose on the back of the appreciating rupee as their
exports are priced in foreign currency.

4. Rising External Debt: Since the start of calendar year 2006, external debt has been
rising with foreign reserves, albeit at a faster pace. In particular, the commercial sector
has been keen borrowers because of the rupee’s strength against the US dollar and the
Japanese yen, as well as India’s relatively higher interest rates and more hawkish
monetary policy. External borrowing in the commercial sector surged to $42.8 billion in
FY ending March 2007, compared $27-28 billion in the previous two fiscal years. Within
a mere three months, external commercial borrowing increased rapidly to $48.3 billion by
June 2007. This represented 29.2% of total external debt, up from a share of 23.3% a year
ago.

4. Excessive Liquidity and Asset Inflation: On the monetary front, the central bank has
acknowledged that the enduring nature of capital inflows has been complicating its
conduct of monetary policy. One major concern is the excess liquidity finding its way
into unproductive sectors that risk fuelling asset inflation in the equity and property
sectors.

5. Job Losses: Huge capital inflows have seen the rupee appreciate 15 per cent against
the dollar since October 2006 and caused significant job losses in export-oriented
industries such as textiles and handicrafts.

6. Inflationary Pressure: Experts are of the opinion that while the pressure on some
seasonal agriculture commodities may ease off, inflationary pressures would continue
due to the rising food prices and the historically high crude oil prices. It needs to be
understood that the impact of the oil price shock this time round has been less disastrous
for India because of the appreciating rupee and the tax cuts and subsidies.

7. Misuse of the Funds: capital inflow in country is very good but due to its utilization
or output is very subdued; it’s is creating a gap and supporting rupee appreciation. E.g
Indian railway plans to raise Rs 728 billion and partially from ECB (External commercial
11
borrowing). Capital inflow is good for development of country but its returns are very
slow because of non productivity and inefficiency of system which affects exchange rates
and results a setback for Indian business community.

IV. Measures to Control the Problem

1. RBI Intervention: In the first five months of 2007-08 to August 2007, cumulative
purchases of US dollars by the RBI amounted to $22.9 billion (Rs. 933 billion). This was
85% of the $26.8 billion (Rs. 1190 billion) bought for the whole of 2006-07 ending
March 2006. Since the start of 2006-07, the rise in foreign reserves has been attributed
mostly to currency interventions to absorb the capital inflows.

To facilitate the interventions, the ceiling for outstanding intervention bonds under the
Market Stabilisation Scheme (MSS) was increased four times in 2007-08 - twice in April
and once each in August and October. In all, the ceiling for fiscal year ending March
2008 was raised to Rs. 2.0 trillion from an initial limit of Rs. 800 billion. The RBI said
that a new limit would be considered if MSS bond issuance exceeds Rs. 1.85 trillion in
the future. The MSS scheme was introduced in April 2004. Essentially, the RBI issues
MSS debt to soak up excess liquidity from currency interventions.

2. Raise Cash Reserve Requirements (CRR): Since December 2006, the RBI has
increased the cash reserve requirement (CRR) seven times from 5.00% to 7.00%. The last
hike in August 2007 was the largest at 50bps, while the previous six increases were
carried out at 25bps a piece. The objective of raising the CRR is also to absorb the excess
liquidity from capital inflows finding its way into the financial system, and eventually
into inflation.

3. Curb External Commercial Borrowings (ECB): In May, the Finance Ministry

prohibited the use of ECBs to build integrated townships, aimed at discouraging private
equity inflows into the real estate sector under the guise of foreign direct investment. On
ECBs by Indian firms, the ceiling for loans with maturities of 3-5 years was lowered to
6M Libor+150bps from 6M Libor+200bps, while those with maturities of more than 5

12
years were cut to 6M Libor+250bps from 6M Libor+350bps. The lower ceiling was
aimed at encouraging only credit worthy Indian companies to borrow funds abroad.
Three months later, it became evident that more direct measures were needed to restrict
ECBs. In August, the RBI tightened overseas borrowing rules for local companies,
affecting mostly small- and medium-sized firms.

4. Ease Capital Outflow Rules: On September 25, the RBI raised the ceilings on
overseas investment by Indian companies and mutual funds. The limit that listed Indian
companies can invest overseas was raised to 50% from 35% of their net worth in
portfolio investments. The ceiling on prepayment of ECBs by Indian companies without
central bank approval was lifted to $500mn from $400mn. The amount that Indian
individuals can take out of the country for investment was doubled to $200,000. The
Indian rupee has been convertible on the current account since 1994. Based on the
Tarapore report, India is working towards fuller capital account convertibility, which will
be carried out in three phases, by the end of fiscal year ending March 2011. Moving
towards capital account convertibility is an important step for India to develop Mumbai
into an international financial centre.

5. Curb Inflows into the Stock Market: On October 16, the Securities and Exchange
Board of India (SEBI) announced proposals to restrict investments by Foreign
Institutional Investors (FIIs)/Sub Accounts into Indian equities through Offshore
Derivative Instruments (ODIs) such as Participatory Notes (PNs), Equity Linked Notes,
Capped Return Notes, Participating Return Notes, etc. Between March 2004 and August
2007, the number of FIIs/Sub Accounts that issued ODIs jumped from 14 to 34, while the
notional value of PNs surged 11 fold to Rs 3,534 billion from Rs. 319 billion. Market
capitalisation on the Bombay Stock Exchange increased by 3.8 times to Rs. 45,380
billion during the same period. The inflows of funds in the stock market have to be
curbed in order to prevent the havoc caused by rupee appreciation.

6. Proper Utilization of Borrowed Funds: Capital inflow is good for development of

country but its returns are very slow because of non productivity and inefficiency of

13
system which affects exchange rates and results a setback for Indian business community.
The borrowed funds should be utilized properly so that returns can be increased.

V. Future

The rupee may rise to 39 by the end of 2008. The median forecast of 19 strategists
Bloomberg surveyed is 40. The spread, or the yield difference, between a 10-year U.S.
Treasury note and a similar-maturity Indian government bond has widened to 3.29
percentage points from 2.77 percentage points on July 18, Bloomberg data show.

Growth in Asia's fourth-biggest economy unexpectedly accelerated in the quarter ended

June 30 to 9.3 percent. The pace of the currency's rally may slow as the central bank buys
dollars. Rising imports, especially fuel purchases, are also a threat to the advance. India's
trade deficit widened to $38.2 billion in the seven months through July from $26.1 billion
a year earlier, according to government data.

Indian capital Markets may continue to receive more foreign investments both FDI and
Port Folio Investments. Indian rupee may appreciate further against US Dollar and
Japanese Yen and may be Marginally against GB Pound Sterling. Trend is likely to
continue in short term and medium term. Companies whose export Market primarily
USA may suffer on account of lower earnings as well as becoming uncompetitive.
Industries such as software, readymade garments, diamonds, jewellery etc., may suffer
unless they take remedial measures.

Companies who are dependent on imports from USA are likely to be benefited. Indian
companies in electronics, computer hardware etc., may face more competition from
increased imports from USA. RBI may increase CRR and SLR to suck out excessive
liquidity in the Market. Investors in the Primary Market and Secondary Market must be
careful. They must be able to curb temptations of greediness and should not allow
themselves being fooled by Market grape vine.

Since, more funds chasing few scripts, valuations of certain fancy scripts may get heated
up beyond sustainable levels. Investors in particular retailer investors are cautioned

14
against such kind of developments. Long term trend, although positive, there may be
huge temporary corrections in share Market. Retail investors must not become panic. As
it was observed on October 12, Sensex lost nearly 400 points in a day after a huge rally of
2000 points in just 12 trading days. Investors should not be panic with such corrections.

Investors must realize that fundamentals of Indian economy and Indian industry are very
good. Global investors will dump in more Dollars into India. But, they also book profits
before year end. There is likely to be a net out flow of investment by FIIs at that time. It
may have negative impact on Sensex. As per normal practice, FIIs bring back
investments towards end Jan 2008. Indian corporates may be tempted top go take over of
Foreign Companies or businesses. GOI may encourage it because of comfortable forex
reserves.

AS India still continues to have current account deficit, RBI may not like to go capital
convertibility of rupee. It is not advisable too. On interest front, RBI may be in a fix –
like Hamlet –to reduce or to hike. Most possibly, it may continue with current rates of
interest.

VI. Conclusion
The main reason for the rupee's appreciation since late 2006 has been a flood of foreign-
exchange inflows, especially US dollars. The rupee's appreciation has benefited the
economy by making imports cheaper. This is no small benefit--containing inflation has
been high on the policy agenda during the past year, as the annual inflation rate (as
measured by the point-to-point change in wholesale prices) rose to 6.1% in January 2007,
compared with 4.2% a year ago. The inflation rate has subsequently moderated. There is
already evidence in India of an export downturn in a number of sub-sectors. The
policymakers cannot afford to ignore the problems of exporters. Although exports
account for a relatively small share of the economy, India's rapid export growth in recent
years has been an important catalyst of economic growth.

Not surprisingly, the Market is preoccupied with linking these measures primarily as
attempts to curb the rupee’s appreciation. A closer look will also reveal that policymakers

15
in India are seeking to avoid repeating the mistakes of the 1997-98 Asian financial crisis,
especially those pertaining to duration and currency mismatch for the funding of its
economic and business activities. Owing to India’s negative savings-investment gap (or
current account deficit), India will need to tap foreign savings to achieve its economic
growth targets and development goals. Given the constraint to meet its fiscal targets, the
government will find a greater urgency to encourage more foreign investments, especially
in infrastructure.

It is in this regard India should strive to open up its economy to more competition, which
in turn, would encourage more efficiency in resource allocation, as well as better
corporate governance.

References
1. Central Statistical Organisation
2. The Hindu Business Line.
3. Reserve Bank of India.
4. IMF WEO Database.
5. www.typepad.com
6. www.rupee.us
7. www.bloomberg.net
8. www.advfn.com
9. www.indiainfoline.com
10. www.finance.yahoo.com

16