The rupee touched a 16-month high of Rs.45.34 against the dollar on Monday, January 10. The trend of rupee appreciation that began in March-April 2009 has accelerated in the new year. The rupee gained almost three per cent in less than 10 working days. In the middle of the previous week, the rupee breached the Rs.46 mark. The Indian currency’s strong showing is in line with the strengths exhibited by most Asian currencies recently. Between December 31 and January 6, the Korean won moved up from 1164.000 to 1136 in relation to the dollar, and the dollar also lost ground against the Malaysian ringgit and the Thai baht. The yen moved up rather sharply from 93.02 to 92.20. In a broad sense, the strength of the Asian currencies is attributable to the relatively robust turnaround of their economies in the post-recession period. In contrast, the recovery in the United States has been tepid as well as uneven. The currency markets saw a mild rally in dollar when reasonably positive employment data emerged during the first week of December. However, the unexpectedly large unemployment figures released at the end of the month accentuated the depreciation of the dollar. It is no surprise that economic news from the U.S. continue to have such a major influence on other currencies even after the global crisis. All talk of replacing the dollar as the world’s reserve currency has proved to be premature and the American currency retains it pre-eminent position in international trade and currency dealing rooms.
In India, the recent gains by the rupee are attributed to a spurt in foreign institutional investment (FII). During 2009, FII flows were estimated at around $17.5 billion. The volume, below the peak in 2007, is high enough to signal a revival of interest in India. There is every likelihood that these flows will swell or at least be sustained as long as returns from India are seen to be higher than in the developed world. A recent statement by the U.S. Federal Reserve Chairman ruling out monetary tightening for now is positive news for stock markets: cheap dollar funds will continue to be available for investment abroad. The Reserve Bank of India has not intervened so far probably because a continuous mop up of dollars will mean a large accretion to reserves. Also, domestic liquidity that is already high will increase manifold, fuelling inflation expectations. The strong rupee hurts exports, now recovering after a long period of decline. The forthcoming monetary policy statement will make clear how the balance is to be struck among the conflicting objectives.