The Indian Rupee-US Dollar Exchange Rate: The Economic Impact of a Strengthening Currency


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Case Details:

Case Code : ECON025
Case Length : 21 Pages
Period : 2007
Pub. Date : 2008
Teaching Note :Not Available
Organization : --
Industry : -
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

Background Note

In India, the RBI had always played an active role in the foreign exchange market. However, since the country faced a severe balance of payments (BOP) crisis in the early 1990s, there was a greater understanding of the importance of the rupee-dollar exchange rate on the economy.

With reserves down to only around $ 1 billion in mid-1991, caused partly due to a fall in exports and also due to a decline in remittances (following the Gulf war), the country was close to defaulting on its debt repayments.

The Indian government then negotiated with the IMF for SDR of around $ 2 billion to stave off any external debt crisis...

Reasons Behind the Appreciation of the Rupee in 2006-07

Toward the end of 2006, foreign exchange inflows, especially of dollars, into India started rising sharply. This put upward pressure on the rupee's exchange rate against the dollar. India's steady economic growth offered several opportunities for foreign companies. Between April 2006 and March 2007, FDI of $ 16 billion flowed in to India...

Effects on The Economy

The rupee's appreciation against the dollar was seen to be beneficial to the Indian economy in some ways, and detrimental in other ways. The rise in the value of rupee meant that inflation was curbed. The inflation rate in India declined from 6.73 percent in February 2007 to 4.10 percent in August 2007...

Some Perspectives

The 'trilemma' or the 'impossible trinity' as economists sometimes called the management of exchange rate, interest rate, and inflation rate, has always posed problems for central banks the world over; and the RBI was not an exception...

Outlook

In June, 2007, the Economist Intelligence Unit estimated that for the year 2007, the rupee's average annual exchange rate against the dollar would be 41.3 (a 13.5 percent real appreciation year on year), and for the year 2008, it would be 40 (6 percent)...

Exhibits

Exhibit I: Trillion Dollar Economies as of 2006
Exhibit II: Indian Rupee-US Dollar Foreign Exchange Rate: August 2006-August 2007
Exhibit III: The Indian Rupee: Background
Exhibit IV: Indian Rupee-US Dollar Foreign Exchange Rate*: 1998-2006
Exhibit V: India's Foreign Exchange Reserves Between 1990-91 And 2005-06
Exhibit VI: Remittances to India in Billions of US Dollars, 1990-1991 to 2005-2006
Exhibit VII: Source Regions of Remittance Flows to India in November 2007
Exhibit VIII: Inflation Rates in India
Exhibit IX: The Exchange Rate of Dollar against Currencies of Some of India's Export Competitors: August 2006-August 2007
Exhibit X: The Recommendations of the Ministry of Commerce in July, 2007
Exhibit XI: The Exchange Rate of Rupee against some Major Currencies between January 2007 and August 2007
Exhibit XII: The Measures Taken by the Government

 

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