India's rupee is showing new muscle as it scales nine-year highs against the dollar, alarming exporters who sell most of their goods to the United States. India's Federation of Indian Export Organisations says the appreciation of the rupee has "severely eroded the profitability of exporters."
The partially convertible rupee has risen by around 11 percent against the dollar since last July, helped by inflows from investors eager to invest in India's booming economy.
"Its appreciation reflects the underlying strength of the Indian economy and, of course, (broad-based) dollar weakness," said Deepak Lalwani, director at London-based Astaire Securities.
But until lately, dealers say, the central bank had been intervening by selling rupees to make sure the Indian currency does not rise too quickly, and to keep a lid on export prices.
Now though, market players say, the Reserve Bank of India (RBI) has eased off from intervention as it seeks to wrestle down inflation in Asia's fourth-largest economy, which is growing by around nine percent.
"The bank has its eye firmly on (capping) inflation," said D.K. Joshi, principal economist at Indian credit rating agency Crisil.
Letting the rupee rise has made imports less expensive, cushioning the impact of strong fuel prices for India, which relies heavily on imported oil which is priced in dollars.
By not selling rupees to buy dollars, the bank also has not added to rampant money supply growth which has been helping fuelling inflation. After dipping briefly this month, Indian inflation crossed six percent again last Friday to hit 6.09 percent, despite a slew of monetary tightening measures. Inflation now is more than half a point above the central Reserve Bank's ceiling of 5.5 percent. Economists expect the rupee's firmness to continue at least as long as inflation remains above target.
"We expect the rupee to benefit from both rising interest rates and the shift in policy focus of the RBI solely toward inflation control," said Goldman Sachs in a research note. The rupee's strength is a novel experience for Indians more accustomed to a currency that a few years ago only seemed to lose ground.
"Until about three or four years ago, on average you would factor in about a five percent annual deprecation," noted Lalwani.
The rupee finished the day on Friday at 41.99 to the dollar. It has notched up most of its gains since the beginning of March, when figures indicate the Reserve Bank was intervening less in the market.
In 2002, a dollar bought over 49 rupees. Now some economists are eyeing a 12-month target of around 41 rupees to the dollar. The rupee has been gathering strength as the world started talking about India as an emerging economic powerhouse.
Comments
Comments are closed.