Indian rupee: does extraordinary growth require RBI intervention?

The RBI (Reserve Bank of India) is between a rock and a hard place: an economy growing at an incredible rate (GDP growth is among the top globally) and a growing Indian rupee that continues to increase in value due to significant volumes of Foreign Institutional Investor (FII).

This year alone, the FIIs have injected about US$20bn into the financial market, resulting in an appreciation of the Rupee by more than 8%. This increase unfortunately coincides with the current hoped-for recovery in exports, a coincidence that could be crucial to the recovery.

Many emerging countries are in a similar condition today: the possibility of interest arbitrage and significant economic growth are turning these countries into a magnet for foreign investors. Precisely in order to strengthen exports, these emerging countries are resorting to devaluing their currencies.

Brazil, for example, has embarked on a path to capital controls while China continues to resist U.S. pressure on opening the yuan to the world market.

Some Indian financial experts argue that RBI intervention will not be long in coming but that care will need to be taken, not only for Export activity, but also for local investment. The appreciation of the rising Indian Rupee could create more inflation but would nevertheless improve the import of raw materials at reduced costs, thus facilitating the activities of many foreign companies that are going the local investment route.

These assumptions are therefore not to be taken as a rule to which the RBI must adhere strictly: the exponential growth of Indian currency is nothing more than the result of an RBI development policy that could be described as “unbridled.”.

Analysts believe the central body will soon feel compelled to intervene to “cleanse” the market of the dollar, an impervious action for the Mumbai-based institution, which will have to simultaneously combat inflation and keep Indian currency appreciation in check.

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