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Message: <blockquote data-quote="ibnanv" data-source="post: 21442933" data-attributes="member: 218596">Over the last couple of months, the Indian  rupee has gained value against the American dollar. In early February  2017, one dollar was worth around Rs67.50. Currently, one dollar is  worth around Rs65. Hence, one dollar buys fewer rupees compared to the  past. Thus, the rupee has gained in value against the dollar. A major reason for the same lies in the fact  that foreign institutional investors (FIIs) are pouring in money into  the Indian stock market. When these investors bring their dollars into  India, they need to convert these dollars into rupees, to be able to buy  stocks. Hence, they need to sell their dollars, to buy  rupees. When this happens, the demand for the rupee goes up and pushes  up its value against the dollar. This is precisely why the rupee has  appreciated or gained in value against the dollar, over the last two  months. In February and March 2017, the FIIs invested  close to Rs408 billion in the Indian stock markets. Over and above this,  the FIIs also invested Rs314 billion in Indian debt markets buying  Indian bonds, in the last two months. This investment of Rs722 billon made by the  FIIs in the Indian stock and bond markets has essentially pushed up the  demand for the Indian rupee, and in the process led to the appreciation  in the value of the rupee against the dollar. These investments have spiked up since March  11, 2017, when the Bhartiya Janata Party (BJP) won a decisive mandate in  the state assembly elections in the state of Uttar Pradesh. Uttar  Pradesh has the largest state assembly in the country. It also elects  the maximum number of Members of Parliament (MPs) to the Lok Sabha, the  lower house of the Indian Parliament. The FIIs are hoping that this win will push  the Na-rendra Modi government in New Delhi to push through a few  economic reforms. Whether that happens remains to be seen. Typically, whenever there is a sudden jump or  fall in the value of the rupee, the Reserve Bank of India (RBI), India's  central bank, tends to intervene in the foreign exchange market in  order to stabilise the value of the rupee against the dollar. But this  time, it seems that the RBI has stayed away. When the rupee is appreciating rapidly against  the dollar, the RBI intervenes by selling rupees and buying dollars in  the foreign exchange market. This essentially ensures that there is an  adequate amount of Indian currency available in the system, and the  ru-pee stops appreciating against the dollar. But what such a move does  is that it increases the total number of rupees in the financial system  and that has its own set of implications. As of now, the Indian banking  system already has a surfeit of money, given the demonetisation that was  carried out in November 2016. Basically, Rs500 and Rs1,000 notes had  been demonetised. These notes needed to be submitted to the banks where  they would be credited against the account of the individual depositing  it. The banks haven't been aggressive about  lending the money, which suddenly ended up with them as deposits, given  that they haven't been sure about how long this money would stay with  them. Given this, banks already have a lot of money  with them and the RBI possibly did not want to add to it by trying to  protect the value of the rupee against the dollar. Also, another  possible reason the RBI has gone slow lies in the fact that India  imports 80 per cent of the oil that it consumes. Any appreciation in the  value of the rupee reduces the oil bill. Of course, this will mean that  exports will get a tad uncompetitive. But that's a choice that the RBI  seems to have made. So where does all this leave us? How soon will  the rupee start depreciating against the dollar? Foreign exchange  markets like the oil market are very difficult to predict. But one  factor that can always be looked at is the rate of inflation in the two  countries. In February 2017, inflation as measured by the  wholesale price index in India stood at 6.6 per cent. Inflation as  measured by the producer price index in the United States, a similar  sort of measure, was at 0.3 per cent in February 2017.Given that India  has a significantly higher rate of inflation, the rupee should lose  value against the dollar, and not appreciate, as it is currently doing.  But there is always a difference between theory and practice. On the  question as to when is the situation likely to reverse, and the rupee  stop rising against the dollar, on that your guess is as good as mine.</blockquote>

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