The Indian Rupee (Part I: The Rise)

The past few years have seen a monumental see-saw in the value of the Rupee. After hovering in the 44-46Rs./$ range for a long time, the Rupee gained in value and rose more than 15% in 2006-07. Then during 2008-09 it fell from around 39Rs./$ to nearly 52Rs./$ (a fall of more than 30%)!! What led to such wild swings in the value of the Rupee, and what does the future hold?




At the heart of the matter is the fundamental rule of economics at work: demand-supply. During 2006-07 the demand for the Rupee was rising, due to a host of interrelated factors:
Global companies come to India: The world suddenly discovered that the Indian economy was growing at 8-9% every year. The huge, and growing, middle class was a big potential market. Everybody and their dog wanted to part of the ‘India story’. Companies all over the world started coming to India. Now, when a company wants to set up shop in India, they need to buy land (by paying in Rupees) pay salaries to Indian workers (in Rupees), etc. Thus all these companies started buying Rupees to fund their operations (leading to a rise in demand for Rupees).
Rise of IT and BPO: After the Y2K success, India emerged as a premier destination for IT offshoring. The Indian BPO industry also picked up steam. IT and BPO companies from all over the world started expanding rapidly in India. Again, to pay their employees, they needed Rupees (thus increasing the demand for Rupees)
Stock Market: While all this was happening, the Indian stock market was breaking one record after the other. Global financial institutions started investing in the Indian stock market (again fueling the demand for Rupees).

The huge demand for the Rupee, led to its sharp rise. As more and more companies needed Rupees, India ended up with a huge foreign exchange surplus (which at its peak was close to 300 billion Dollars).


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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can also be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.