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Mystery of Rupee Appreciation

                                       Rupee Appreciation: what does strengthen it?
                                                                                                                               Anuj Chaudhary

The current rupee appreciation, from Rs. 68 per dollar to Rs. 64.50 after the bi-monthly review of Reserve Bank of India, now it has surged one and half year high. In 2013, at this time, the rupee fell almost 12 per cent in few weeks. So it is to make sure that the current gain has been less in term of percentage but this sharp change is also triggered because of portfolio investment inflow. On the other hand, Federal Reserve Bank has raised its interest rate to 2 per cent.

But, portfolio investment does not have any long-term impact on rupee appreciation but these IPIs will help to attract more investments in the first quarter FY17-18.  Any aggressive buying of dollars by the RBI at this scenario will only add to the excess liquidity that is already so evident in the money market. Informal estimates suggest that the excess liquidity right now is somewhere to the tune of Rs3 trillion. Spending by the government in the new fiscal year that starts in April will also lead to a further injection of liquidity into the financial system.

It is thus likely that the Indian central bank has stayed away from foreign exchange intervention because it does not want to further exacerbate the excess liquidity problem, because it will have to release rupees into the market whenever it buys dollars. Sterilization firepower is limited right now, which is precisely why it had to issue market stabilization bonds in the first place.
The RBI will also have to take into account the fact that loose money market conditions could eventually feed into inflation. Getting the balance right is important. As RBI has kept interest rate unchanged i.e. Repo Rate 6.25% whereas, RBI has slightly adjusted Reverse Repo Rate from 5.75 to 6 per cent or by 25 basis points to tackle excess liquidity and inflationary factors. This market stability is going to generate more investments but if Rupee valuation continues then it will hurt Indian export for sure.
At this juncture, India needs more long-term foreign investment in collaboration with domestic firms that will bring some liability and credibility in the market. 

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