Don't fret too much over a strong rupee

Don't fret too much over a strong rupee

It shores up the capital account, and some exports.
With nearly half-a-trillion dollars of external debt and another $400-billion-plus stock of foreign portfolio investments in Indian debt and equity , Indian policymakers have to learn to weigh the impact on the capital account of the country's external transactions of any changes in the exchange rate, and stop obsessing over what such changes mean for exports. Sure, exports are important and policy must encourage them, but not at any cost. A weak rupee would play havoc with company balance sheets and stock markets.
The rupee has been one of the strongest emerging market currencies and has strengthened against not just the dollar but against a host of Asian currencies as well. This does affect the competitiveness of Indian exports. However, the very factors that are pushing the rupee up also work to boost the demand for exports from India. Forecasts of stronger global growth in general and in the advanced economies, in particular, have buoyed investor sentiments. Stock market indices are rising to record levels in the advanced markets and find sympathetic movements in emerging markets. As the fastest-growing large economy , India receives more than its fair share of the fruits of global investor optimism. Such investment inflows, supported by foreign direct investment inflows, are responsible for the rupee's strength. The RBI cannot purchase too many dollars to restrict their supply in the currency market: the banks are already flush with demonetisation-induced liquidity and the RBI would have to aggressively sterilise the counterpart rupees of dollar purchases. That would push up interest rates. The alternative of allowing the rupee to rise and reaping the added benefit of cheaper imports, including oil, holds far more appeal. After all, India's current account deficit is about 1.5% of GDP , and has plenty of room to rise within the limits of prudence.
Robust global growth will raise the demand for exports.All import-intensive exports -refined petroleum, gems and jewellery, pharmaceuticals, IT services -will gain from a strong rupee. It would keep inflation down and incentivise project imports, too.