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These capital inflows can be in the form of: -

1. Foreign Direct Investment

2. Portfolio Inflows (Foreign Investment in Equity)

3. External Commercial Borrowings by Indian Companies Abroad

4. Remittances to India by Non-Resident Indians

Since the Indian Economy and the Indian Stock Markets have been on a roll, the capital inflows to India has been pretty strong which has primarily led to the appreciation of INR.

Implications of Rising Indian Rupee

First and foremost, the appreciating Rupee puts pressure on export competitiveness of any economy. The exporters earn their income in dollars which is spent in Rupees back home for further investment or consumption. If the Rupee appreciates (taking their dollar earnings to be same), the earnings in Rupee terms fall.

To explain it better. Say that exchange rate is US 1 $ = 50 INR. If an exporter X earns US $ 1000 by exporting his goods/services to US, his earnings in Rupee terms is Rs. 50,000. If the Rupee appreciates to US 1 $ = 40 INR, then in rupee terms the earnings of exporter will be Rs. 40,000. A fall in earnings despite the exports being constant. But the exporter who is based in India has to spend in INR in India; he has less money at his disposal constraining his further growth by way of limiting his investment capacity.

The IT and ITES have been primary contributor to exports, and for 1% appreciation in INR, their earnings fall by 0.75%. Then the factor of competition with China comes into play. For long, Chinese Remnibi has been kept artificially low thereby making their exports cheaper compared to India's. And hence, Chinese getting an edge in exports where both countries compete head-on.

However, the rising Rupee doesn't mean bad news on all fronts. Appreciating Rupee brings a good news on Imports front and corporate borrowings front. Since India imports close of 70% of its Petroleum requirements, appreciating Rupee makes the oil imports cheaper, thereby putting less pressure on India's forex reserves. Another aspect where rising rupee brings benefits is in sense that Indian corporates can raise the money from foreign markets on much cheaper terms and it also makes it cheaper for them to buy assets abroad.

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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.