The Indian Rupee (INR) has seen a tremendous apprecation against the US dollar (USD) in the last 6 months. The INR has appreciated approx. 9.32% against the USD comapred to begining of this year. India has seen a large inflow of FII's and FDI's moving into the country, leading to large inflow of foreign currency reserves. This has forced the centeral bank to intervene in the forex market to get it stabilized.
There has been a interest rate hike three times in the last one year and now the RBI is trying to control the amount of ECB's getting into the country to control the use of forex. Let us look at the pros and cons of this decesion:
Pro's
- Crubs the current inflation rate in the country in the medium term
- Keeps the interest rate in the economy stable in the short term
- Helps the exporters to cover up the profit margins and makes export favourable
- Stabilize the forex markets in the short term
- Helps in short term policy making
- Discourages improper utilization of forex
Con's
- Could put a break in the growth of the economy if, it continues for a long time
- Increases the risk factor component when an investment analysis is being conducted
- Reduces the liquidity in the market
- Leads to un-fair trade practices
The question which remains to be seen is how long the pro's of this decision going to hold a upper hand.
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