The Indian Rupee-US

Dollar Exchange Rate: The

Economic Impact of a
Strengthening Currency

Presented By:-
• In April 2007, on the back of a rising rupee, the Indian economy
became a trillion dollar-economy

• By August 2007, the Indian currency experienced an appreciation of

12 percent

• The rise in the value of the rupee was a result of the general
weakening of the dollar in international markets

• In 2006-07 India attracted huge capital inflows

• Reserve Bank of India (RBI) intervene in the foreign exchange market
and purchase excess dollars

• The rupee’s appreciation affected Indian exporters as Indian goods

became more expensive for foreign buyers

• IT Industries and textiles industries were particularly hard-hit.

• Leather, sugar, and plantation crops were some of the other sectors that
starting to lose competitiveness.
• Sectors which were neither net exporters nor net importers were
unaffected

• Analysts believed that the rupee’s appreciation would not significantly

affect the economy

• In July-August 2007, the government of India announced measures to

counter the negative impact of the rupee’s appreciation on India’s exports

• The RBI also started buying dollars from the market

Reason behind appreciation of Indian rupee in 2006-2007
• Toward the end of 2006, foreign exchange inflows into India started rising
sharply
• Between April 2006 and March 2007, FDI of $ 16 billion flowed into India
• By August 24,2007, India’s foreign exchange reserves had increased to a
record $ 228.8 billion
• Apart from the equity issues, several Indian companies borrowed massive
amounts of money and this also contributed to the dollar inflows
• NRI deposits was another major source of capital inflows

• The first quarter of 2007-08 recorded External commercial borrowings (ECBs)

of $ 48.3 billion

• An increase of 12.9 percent compared to the first quarter of the previous year

• Export growth also contributed to India’s increasing foreign exchange reserves

• By allowing the rupee to appreciate, the RBI hoped to control inflation by

making imported goods cheaper
Impact of rupee appreciation on the economy
• The rupee’s appreciation against the dollar was seen to be beneficial to
the Indian economy
• The inflation rate in India declined from 6.73 percent in February
2007 to 4.10 percent in August 2007
• The rupee’s appreciation also benefited importers as well as
manufacturers
• The rupee’s appreciation reduced India’s external debt
• Companies that had borrowed in dollars from international banks also
benefited from the rupee’s appreciation

• The rupee’s appreciation also cushioned the impact of increasing crude oil
prices in the international market

• Companies in sectors such as oil and gas, automobile were able to import
items at much cheaper rates than before

• Aviation and Engineering industries were also benefitted

The role of the central bank in the foreign exchange market

• During 2007-08, the Reserve Bank took several initiatives to provide a more conducive
environment

• Concomitantly, powers were delegated to authorized dealers

• The recommendations of the Committee on Fuller Capital Account Convertibility

(CFCAC) were initiated towards further liberalization of foreign exchange transactions

• The condition of submission of evidence of re-import was relaxed

The possible
future
movement of
the rupee vis-
à-vis the US
dollar