Indian rupee: does extraordinary growth require RBI intervention?

The RBI (Reserve Bank of Indiais caught between a rock and a hard place: an economy growing at incredible rates (GDP growth is among the highest globally) and a strengthening Indian rupee that continues to increase its value due to significant volumes of Foreign Institutional Investor (FII) inflows.

This year alone, foreign institutional investors have injected approximately $20 billion into the financial market, resulting in an appreciation of the rupee of more than 81% over the past three months. Unfortunately, this increase coincides with the current, much-anticipated recovery in exports—a coincidence that could prove crucial to the recovery.

Many emerging countries find themselves in similar conditions today: the possibility of interest arbitrage and significant economic growth are transforming these countries into a magnet for foreign investors. Precisely in order to strengthen exports, these emerging countries are resorting to a devaluation of their currency.

Brazil, for example, has taken a path of capital controls while China continues to resist American pressure to open the Yuan to the global market.

Some Indian finance experts argue that the RBI's intervention will soon arrive, but caution will be needed, not only regarding export activity but also local investments. The appreciation of the Indian Rupee, as it grows, could create higher inflation but would nevertheless improve the import of raw materials at reduced costs, thus facilitating the activity of many foreign companies pursuing local investment.

These assumptions, therefore, are not to be considered a rule to which the RBI must strictly adhere: the exponential growth of the Indian rupee is nothing more than the result of the RBI's development policy, which we could define as “unbridled.”.

Analysts believe the central authority will soon feel obligated to intervene to “clean up” the market from the dollar, a difficult action for the Mumbai-based institution which will have to simultaneously fight inflation and control the appreciation of the Indian currency.

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