India’s Expensive Rupee

While the Sri Lankan rupee continues a downward spiral, losing value against other currencies, India’exchange rate currently stands at Rs 40: US $ 1, and doesn’t show any sign of losing steam.

This outcome is an obvious sign of the attractiveness of the Indian economy – the high demand for the Indian rupee sparked mainly by the large influx of foreign funds. But the picture isn’t all that rosy to everyone, having negative repercussions on one of the drivers of economic growth – exports.

According to an article published by the Economist, exporters in India have expressed their concern over the rising rupee, arguing it has reduced foreign demand for their products. Rakesh Mohan, Republic Bank of India’s Deputy Governor, recently suggested that India were experiencing symptoms of the Dutch disease.

In the apparel sector – one of India’s major export industries – the strong currency has eaten into the value of exports to the US, which declined by 3.5% year on year in January-April 2007.

The Republic Bank of India have responded by making it more difficult for Indian firms to borrow in foreign currency and eliminating the exemption from ECB limits. While one wonders the extent to which this measure can counteract the effect of massive inflows of foreign currency into the country, it definitely is a start.