Appreciation of Rupee - Is it real & sustainable

Hai friends,

I am back to blogging. I am continuing in my Department in the Central Government. I wish the very best to all the GMAT takers who wants to attain the success through MBA education in famous international schools like ISB, Wharton, Kellogg, London Business School etc.

Now coming back to the topic, everyday we are seeing in the newspapaers that Indian currency appreciated more than 2% since January 2007 against US Dollar. The main reason being that Reserve Bank of India has reduced its role in absorbing the dollars coming in the form of capital inflows mainly FII inflows. This is because the Government wants to reduce inflation. One of the ways to reduce the inflation is to reduce the money available with the public. RBI used to buy the Dollars in exchange of Indian rupee so as to maintain the parity vis-a-vis the US dollar. This in turn increased the money supply. Now, the RBI has reduced the above activity so as to reduce the money in the hands of the public to contain inflation. But, this has a side effect i.e. the demand for dollar reduces and in the result, the Indian rupee appreciated against US Dollars. In fact, our currency is fully convertible on current account i.e to buy goods and services across the border but not an capital account like investments to be made by Indian abroad and vice versa. Now imagine how the Rupee will appreciate if the RBI has no role in this sterilisation process.

In fact, with the economic growth momentum picking up in future, - GDP growth rate of 8-9% expected in the next 10 years - it may not be far off when One Dollar can be bought for as few as Ten Rupees. As per the Report titled "Dreaming with BRICs - The path to 2050" prepared by Goldman Sachs, an international consulting agency, India's economy could be larger than all but the US and China in next 30 years . As per the Report, India has the potential to grow that could be higher than 5% for the next 25 to 30 years. The appreciation in the currencies of BRICs may to the extent of 300% in 50 years, an average of 2.5% a year. Rising exchange rates could contribute a significant amount - as much as 1/3 rd - to the rise in US dollar GDP in the BRICs, report says. In fact, due to recent appreciation of Rupee vis-a-vis US dollar, our present GDP in dollar terms crossed US $ 1 trillion. In fact, if the projections in the report come true, the real GDP of India in dollar terms will cross that of Italy, France, Germany and Japan by 2035.

Related Reports :-

1. Dreaming with BRICs - The Path to 2050 - A report by Goldman Sachs

2. How solid are the BRICs? - A report by Goldman Sachs