Tuesday, May 15, 2007


The Indian Rupee has recently appreciated, significantly against all major currencies of the world. The fluctuation in Indian Rupee – US Dollar Exchange Rate has been a matter of great concern for the exporter community as Dollar has appreciated from its peak of Rs. 46.89 on 24th July, 2006 to a level of Rs. 40.71 on 9th May, 2007 (a fall of 13.18%).

Currencies                 Current Exchange Rate              Change (Percentage)
                                                                                       3 Months  1 Year

British Pound             81.14                                           (-) 6.21     (-) 2.87
Chinese RMB            5.29                                             (-) 7 .12    (-) 5.86
Euro                          55.13                                            (-) 3.76     (-) 3.50
 Japanese Yen           0.34                                              (-) 6.70     (-)17.09
Singapore Dollar     26.85                                             (-) 6.69     (-) 6.37
Swiss Franc             33.45                                             (-) 5.32     (-) 9.10
US Dollar                 40.71                                             (-) 7.79    (-) 9.77

The exporter community led by Commerce Minister Mr. Kamal Nath has been pressurizing the Government and Reserve Bank of India (RBI) to intervene and buy Dollar from the market to curb the appreciation of the rupee vis a vis other major currency, specially US Dollar. How far pressure of exporting community is justified is to be examined in the backdrop of the following :-

  • In 1991, Dr. Man Mohan Singh as Finance Minister intervened in the Forex Market in 2 trenches and US Dollar appreciated from Rs. 16 to Rs. 32, just in a matter of 3 months
  • India had a fully controlled exchange control regime before this and India had a very tough time in 1990,as due to lack of foreign exchange ,India had to mortgage its Gold Reserve.
  • A price parity research between India and US indicate that most of the products in the US market are about 5 times costlier (on an average) as compared to the Indian market, on the basis of current exchange rate.
  • As per price parity US $ - Indian Rupee Exchange Rate should be in between Rs. 10 to Rs. 15.
  • The foreign exchange reserves of India are more than US $ 200 billion, whereas the official reserve are in excess of US $ 120 billion. This amount represent, in majority, the Dollar purchased by RBI from the open market.
  • There has been a continuous debate between Finance Ministry and RBI about utilization of Foreign Exchange Reserve for lending to the corporates. RBI has all along opposed this move of the Gov in view of inherent risk. The congress had included in its manifesto that it will use Forex reserves for on lending.
  • In case rupee appreciates further the landed price of the imported commodities and other goods would reduce further, which will put necessary pressure on the Indian inflationary condition.
  • The exports from India will become less attractive and exporter will have to focus on cost reduction and innovation significantly.
  • In case RBI does not intervene by fresh acquisition of Dollar in the market, rupee may significantly appreciate further and may reach Rs.35-Rs.30 in 6-12 months.
  • The rupee appreciation may result into–
  • Pressure on inflation
  • Reduction in money supply (M-3)
  • The RBI activity of market stabilization, by sucking rupee supply from the Market against issuance of government securities will go down, thereby reducing the burden of interest on the government.
  • The Indian interest rates are currently 3 to 4% higher, as compared to international benchmark. The appreciate rupee will put further pressure on the interest rate to more reasonable and realistic level comparable to international benchmark.
Now the crucial question is, as to whether RBI and the Government should allow the rupee to fluctuate as per the market condition or RBI should intervene to take care of the interest of the exporters and then also address, resultant money supply by utilizing additional market stabilization fund of 30 000 crores, allocated to Reserve Bank recently.

It is a hard fact that due to pressure of the exporting community as well as due to lobbying of Indian industry, RBI has been taming the rupee for last 2-3 years. The Indian domestic industry has long standing apprehension that in view of significant reduction of custom duty rates (fiscal barrier) and withdrawal of almost all physical control on imports by the government, the Indian domestic industry is being subjected to tough competition from international markets. A sharp reduction fluctuation in forex rates as noticed in last 3 months is more killing for the Indian economy, as there is no effective hedging mechanism is available with the Indian market. However, an artificial rupee-dollar rate is only helping the international customer at the cost of the Indian domestic customer. Our goods are being exported at an artificially low price, whereas the imports are artificially priced high, thereby impacting the Indian consumer and benefiting the foreign consumer. Ultimately, the exchange rate has to be determined on price parity determined by inflation in the domestic economy Vis a Vis the international markets.

We are of the considered view that the Government of India and RBI need to have a serious debate on the exchange rate management strategy and they should consider the following in the interest of the long term Indian economy as a whole:

  • RBI intervention in the foreign exchange market should be primarily aimed at addressing wide and swift fluctuation, thereby allowing the Indian rupee to appreciate or depreciate, in terms of market dynamism, without wild fluctuation.
  • The current Foreign Exchange Reserve of more than US dollar 200 billion are reasonably adequate to support a market correction and even if rupee appreciates, the impact of short term trade deficit can be absorbed by the Forex Reserve.
  • RBI and the government need to keep a close vigil on the other major economies and their strategy regarding exchange fluctuation;
  • In the WTO Forum, the Indian Government should take up that international economies should shift to market driven exchange rate parity. In case certain major economy like China continues to control their exchange rate, a free international competitive market cannot be contemplated. The reduction in fiscal barrier and withdrawal of physical barrier are not enough to achieve free international trade. It is necessary that the foreign exchange market be also left to the market forces, without any major intervention by the respective government, including the Government of US and European countries.
We, as India are poised for a significant growth and sudden fluctuation in the exchange rate, similar to what has happened in last one month or in last 3 months is not healthy for a sound Indian economy. The Government needs to strategize clearly and also ensure that Forex Market in India including derivative market, forward market and other hedging mechanism are made available in a free, fair and transparent manner through computerised exchange trading similar to equity trading in the Stock Exchanges. The foreign exchange is an important necessity for the Indian Market and it cannot be left to the OTC Market.


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