The Hindu Business Line : Rupee appreciation might benefit

THE management guru, Peter Drucker, is the latest in a long line of foreign investors (like Marc Faber and Mark Mobius), fund managers and investment banks to fall in love with India.

He thinks the country will become an economic powerhouse because of the size of its English-speaking population, university output of engineers (far more than the US) and growing urban population.

Drucker's endorsement of India's economic prospects and the Dow's and Nasdaq's strong performance on Monday boosted stocks on Tuesday with the Sensex keeping above 6,000 (although closing below later). The market's next target is being spoken of as being 7,000-7,500 (the superoptimists dream of 9,000).

A bull run does seem to have come to stay. And it does seem to be based on sound fundamentals. After going through a wrenching, prolonged recession and restructuring, Indian companies are making their presence felt on the international stage and turning into global players.

Who would have thought that we could export cars - yet it is happening. It is not only a Maruti with the help of a Suzuki, or Hyundai, a 100 per cent subsidiary of its South Korean parent, but also, heartwarmingly, TVS Motors with its own technology and brand name, which are foraying into world markets.

Brawnpower is joining brainpower in transforming our companies and the India image.

Something similar to what happened (and is happening) to China looks like being repeated in India. Foreign money is becoming a flood. It is posing a headache to the RBI. If left to itself, it would lead to a sharp upsurge in the exchange rate of the rupee. Thus, dollar mopping up operations on the part of the central bank have now become a well-established routine. The US currency is kept artificially high.

The RBI's forex market intervention is overflowing into the money market. The banks are happy to place their liquidity back with the RBI at the repo rate of 4.5 per cent, in the absence of any attractive alternative deployment opportunities. The monetary authority is loath to cut rates because its thinks inflation is too high, which does nothing to discourage foreign funds lured by the high returns. The vicious (or virtuous) cycle, depending upon how you look at it, is complete.

Allowing the rupee to appreciate might actually allow more elbow room to the RBI. The effect of higher world oil prices - a significant contributor to inflation - would be offset to a certain extent by a stronger currency. This, in turn, would give room to cut interest rates and reduce the arbitrage - induced inflow.

The dollar has appreciated 250 per cent against the rupee in the last decade. Interest rates - domestically and abroad - are at rock bottom levels. Our exports are increasingly becoming competitive on non-price factors. There seems some leeway for the RBI on the exchange rate front.

Some appreciation of the rupee is not likely to hurt anyone.

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