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Indian Rupee takes on the US Dollar - Views on News from Equitymaster
 
 
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  • Oct 12, 1999

    Indian Rupee takes on the US Dollar

    The Indian economy is currently witnessing a grim scenario in which it is grappling with slower than expected tax collections on one hand and burgeoning expenditure on the other (increasing revenue deficit). Industrial growth and agricultural growth have been below expectations, fuelling fears of a delay in economic recovery. The broader measure, GDP, has grown by 5.5% during the second quarter, 50 basis points lower than the 6% target growth.

    One could just go on and on about the present fundamental weaknesses of the Indian economy. However, the stock markets, which are considered to be a barometer of a country's overall performance, are booming (up 7.1% since 6th of October). More importantly, the exchange value of the Indian Rupee has appreciated sharply against those of its peers, gaining 21p against the US Dollar. What has caused the surge in the value of the Indian Rupee?

    According to John Maynard Keynes, a strong domestic currency does not necessarily represent a fundamentally strong economy. This seems to be true in the Indian context also. What, however, has supported the surge in stock prices and the Indian Rupee is the expectations political stability and a booming economy (spurred on by economic reforms). The upgradation of India's outlook by Moody's has also contributed in a significant manner.

    With the change in the political and economic outlook (supported by Moody's upgrade of India's outlook), the inflow of fresh funds (portfolio and direct investment) into the country will in all likelihood gain pace. Though it cannot be said for certain (due to non-availability of statistics), a fair degree of the appreciation in the value of the Indian rupee may have been accounted for by the inflow of foreign funds.

    A sustained inflow of foreign funds, coupled with domestic private sector savings, will help finance the government's burgeoning fiscal deficit. This will spur economic growth, by supporting the expenditure (capital and revenue) plans of the government and the private sector.

     

     

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