Edward Hugh over at BonoboLand has a good analysis of the implications of a rising Rupee.
On the rising Rupee: The underlying difficulty is due to what Andy Mukherjee calls the `Impossible Trinity’ (this expression was, if I am not mistaken, coined by Paul Krugman). Essentially:
“no country can simultaneously keep its exchange rate fixed, its monetary policy independent and its capital market open to the world. Policy makers can only choose a maximum of two out of the three goals”
Essentially this is the juggling act that the Indian government must now try to employ. Letting the currency rise will surely reduce competitivity in some areas: but maybe these are areas which are long due for reform. Maybe this is a clear case where such pressures can bring long needed structural reform. Lowering the interest rate would stabilise the currency, and reduce the government deficit, but at the price of increased inflation, and increased private indebtedness: Choose the evil you prefer! [Edward Hugh/BonoboLand]