Dollar on a diet, Rupee on a roll

You may have noticed it or ignored it, but something has been happening to that currency note which you handle daily. After being emaciated ...

You may have noticed it or ignored it, but something has been happening to that currency note which you handle daily. After being emaciated for years, it’s been gaining weight. This weight gain has a lot to do with the diet the US dollar is on. The rupee is rising strongly against the dollar, giving anxious moments to exporters, NRIs, regulators and the government. This is because directly or indirectly, the dollar value impacts the entire country. The main reason for the 3.5 per cent rise in rupee since March 10, is the huge inflow of dollars. Normally when dollars come

to India, the Reserve Bank of India (RBI) mops up the currency from the market to add to its foreign exchange kitty, which is currently at a record level of $ 110 billion. But RBI has not been mopping up dollars from the market in the last month. This situation has boosted the value of the rupee against the American greenback.

But the big question mark remains: why is the RBI reluctant to mop up excess dollars in the system? When the RBI buys dollars, it releases an equivalent amount in rupees in the economy. So the more dollars it buys, the more rupees float around in the market, making for an inflationary pressure. A headache for the government that has promised a 4.5 per cent inflation rate repeatedly. And inflation just before the elections is not an option! Therefore the decision to stop buying dollars with an inflation target in mind.

But significantly, the Finance Minister and the RBI Governor have looked at the rupee-dollar scenario in different ways. While the former indicated it could be the inflation management strategy, the message from the Mint Street is that demand and supply are at work, nothing more.

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As a short-term measure, the RBI policy may have hit bulls’ eye but will it be good for the waistline of the economy long term?

Rupee rising: some like it fat, some like it thin
COMMON MAN: If the RBI doesn’t buy dollars, price levels remain low and inflation is under control
TRAVELLERS: For travel abroad, travellers need to pay less rupees to buy dollars
NRIs: When non-resident Indians remit funds from abroad, they will get lesser amounts on conversion
EXPORTERS: When they bring in dollars, their earnings will fall after conversion into rupees
IMPORTERS: A strong rupee will bring down import costs.