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of a Strengthening Currency
"The
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)...
Case Study Questions:1) Explain the reasons for the rapid appreciation of rupee in 2006-2007.
2) Explain the impact of rupee appreciation on the economy.
3) Critically analyze the role of the central bank in the foreign exchange
market.
Answer of Case Study Questions:Ans:- 1In 2006-2007, India experienced rapid appreciation of its currency against the
US dollar. The reasons for the appreciation of the rupee were a generally weak
dollar in international currency markets and sharp increase in dollar inflows into the
country, partly due to India's increasing attractiveness to foreign investors . Between
April 2006 and March 2007, FDI of $ 16 billion flowed in to India...
Ans:-2 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. the rupee's appreciation affected Indian exporters as Indian goods became
more expensive for foreign buyers. Information technology (IT) and textiles industries
were particularly hard-hit, as they were the most dependent on the US.
Leather, sugar, and plantation crops were some of the other sectors that were
starting to lose competitiveness. The Indian Micro, Small and Medium Enterprises
(MSMEs) were also affected. It was feared that falling export competitiveness would
cause
substantial
job
losses
Ans:-3 India's central bank, intervene in the foreign exchange market and purchase
excess dollars so as to minimize volatility in the value of the rupee. This time around,
the RBI chose not to intervene, in order to keep domestic inflation, which had been
hovering around 6 percent in early 2007.