The Indian Rupee has risen 8% in value this year and is now Asia’s strongest currency against the US dollar. As always, strength is a double edged sword however. Indian companies that have large foreign currency borrowings are finding their debt repayments cost less, and the State oil industry and airlines are also well poised to take advantage of this - a point not lost on the national treasury and it’s aviation regulators. They have just reduced from a five year qualifying period to three the required time in business a domestic airline must have been operational before it qualifies for the lucrative international routes. And potential domestic mergers there - and in particular between Jet and Kingfisher - can have their cake and eat it too as the debt financing risk is reduced and India gets more planes in air coupled with more direct global trading routes.

However, not everyone is happy. Indias diamond trade, long a benchmark industry, is feeling the pinch. Made up mainly of medium sized companies, currency hedging for them is a more expensive proposition, while the Indian petroleum business, limited to just a handful of major players, has greater ability to spread risk due to the larger amounts of capital it collectively has at it’s diposal - one of the reasons it has overtaken diamonds as India’s largest export earner in the past two years.

The Reserve Bank of India - the regulator in all of this, has played its hand conservatively, especially being worried about inflation, and has hiked interest rates five times already this year to try and curb it. It’s also been buying dollars - $USD20 billion so far in 2007 to try and stem the rise of the rupee - although the currency still kept climbing. However, the Ministry of Finance has subsequently stepped in to reduce liquidity - banning the remittance of forex in margins trades in overseas exchanges and adjusting monetary policies to allow greater outflow of funds. Capital controls have also been mentioned as a possible move to head off the spectre of inflation.

Essentially however the RBI sees a soft landing for the rupee, by letting it be more exposed to the vagaries of market demand. This could mean however extensive damage - exports being hit, while cheaper imports harm developing domestic industries, only recently themselves free from the old shackles of inter-State market protectionism. Cheap Chinese goods replacing cheap Indian ones is not a political or patriotic problem the nation is ready for right now.

Whichever, although the rupee sits in a partially eviable position as top dog in Asia - its government, like the Chinese before them just north of the Himalayas, need to adopt strict measures to curb the overheating economy and allow development without too many bumps. 2007 & 2008 are the years when they will be put to the test - and with an Indian Presidential election just about due - a sustainable and prudent economic policy will be high on the list of business voter concerns.

This entry was posted on Thursday, July 12th, 2007 at 2:46 am and is filed under Government, Business, Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.