The rupee has been on a sustained uptrend for the last 18 months. In 2007 alone it has appreciated by over 12% against the US Dollar. This has largely been due to the large amount of inflows in the form of Foreign Direct Investment (
FDI), investment by Foreign Institutional Investors (
FII) & External Commercial Borrowings (
ECB) by Indian corporates.
India is a developing economy & needs a lot of capital to sustain its growth. The recent moves of the RBI & Finance Ministry to curb foreign inflows is a wrong move; its like throwing out the baby along with the bathwater! The rupee appreciation has been a big challenge for most Indian companies. Instead of curtailing inflows India needs to increase its ability to absorb foreign inflows into sectors like infrastructure, retail, power, Oil & Gas, etc.
The reforms process is also crucial, but due to political (read power) needs the government is also not taking the reforms process forward. The reforms process can
stimulate the Indian economy & not only keep the growth going but will also increase the ability of the economy to absorb more capital.
While the RBI & Finance Ministry's desire to keep the rupee from appreciating too much may be acceptable, the way they are going about doing it is certainly not.