The article illustrates the appreciation of the Indian rupee and its potential effects to the Indian economy. Appreciation is defined as the increase in a currency’s value in terms of another currency.
The Indian rupee is said to appreciate from foreign investments and credit flows into the Indian economy, as well as a lowered interest rate. The main cause of the Indian rupee’s appreciation is that “two large foreign banks are understood to have sold almost a billion (US) dollars”. By selling the dollars, these foreign banks increase the supply of dollars in exchange for an increased demand for rupees. This action led to the value of the rupees to raise. This is shown in Diagram 1 as D1 shifts right to D2, and the raised price of rupee in terms of the dollar from P1 to P2, portraying the strengthened rupee.The appreciation of the rupee may lead to more expensive Indian exports for foreign consumers.
This is supported by Ananth Narayan, regional head of financial markets, ASEAN and South Asia at Standard Chartered Bank, who stated that “there has been a lot of unhedged foreign currency exposure in the market” and “(further) strengthening of the rupee would be bad news for the exporters”. This is because it reduces the competitiveness of Indian exports, and eventually increases the demand from local Indian consumers for higher-priced imports. As such, this tetoriates India’s current account – the sum of trades in goods and services, net flow of income, and current transfers. In addition to declined demand for Indian goods, it could potentially cause a fall in employment in its export sector and import-competing domestic firms. If this continues, India’s unemployment, the people of the working age who are willing and able to work but cannot find a job, will increase in the long run.However, since net exports act as a component of aggregate demand (AD), its reduced amount indicates a fall in AD, shown by the leftward shift from AD1 to AD2 in Diagram 2.
This may lead to cost-push inflation with