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The problem facing Indian Economy in general and Reserve Bank of India in particular can be described by "Dutch Disease", a situation where there are large inflows of foreign exchange which in turn leads to appreciation of the currency undermining the export industries.
And if we add the rising inflation which makes it imperative to let the currency appreciate to control inflation, it exacerbates the problem further.

Appreciation of Rupee

The Indian Rupee (denoted by INR) has appreciated 10% against major currencies of the world in less than three months and it's at an all time high in last 9 years. That was a serious cause of worry for RBI for the reason the "Herd Effect" such sudden appreciations bring along.

The graph below shows the movement of INR against US $.

Exhibit 1

Source: www.x-rates.com which tracks exchange rates on the basis of data provided by Federal Reserve Bank

First let's have a look at the dynamics of currency movement. Just like any other commodity, the currency of any economy is based on dynamics of supply and demand, and its value depends on trading in currency exchanges all over the world. Higher the demand for a currency on an exchange, the stronger it becomes and vice versa. However, for currencies like INR which are not traded on exchanges, the value depends on capital inflows in the country.

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* Contributed by: -
Vijay Singh Poonia,
PGDM 2007-09,
IIM Calcutta,
Has work experience of 3 years with Indian Oil Corp Ltd.