[KGV]

A lot of people have lost because of the appreciation of the rupee but, pegging the rupee at a fixed level is not the solution. Let me explain it for others why China pegs (i.e. manipulates) its currency at a lower value. China, by pegging its currency to a lower level, makes its exports cheaper in the world market (refer to the article for clarification). But we unlike China, we have a lot of fiscal deficit. The Balance of Payments (article on it under construction.. due to release in July) scenario for India is not as positive. In fact, US has a lot of debt with China (i.e. US owes money to China) and that debt is increasing because of the cheaper yen. For India the situation is different. We owe money in dollars to various countries/institutions. So if rupee appreciates, its good for India. Also in a free market , pegging a currency is very difficult. The value of a currency, say rupee is determined by the demand supply dynamics for that currency with respect to a single currency or a group of currencies (called as basket of currencies). The rupee, is pegged only to dollar , meaning if the demand for rupee increases (or the supply of dollars increases) the rupee appreciates and vice versa. Now for RBI to peg rupee to a value of say 45 rs/dollar, it needs to suck up all the dollar supply by buying dollars and thus increasing the supply of rupee in the market. This will cause a relative scarcity of dollar, which will tend to appreciate the dollar price and hence maintain the rupee value. In the inverse case if the rupee starts depreciating further below the 45 mark then the RBI will have to create a situation in which the supply of rupee will be less as compared to the demand for it. This is done by hiking the CRR anr the interest rates. (CRR - cash reserves ratio * separate article will be released for this in coming weeks). Thus it is very difficult for RBI to manipulate the currency rates for a long time and also its in the country's interest that the rupee appreciates. And at the end of the day in this era of high inflation who won't like the imported goods to be cheap.