India is going through an unprecedented phase of burgeoning foreign exchange reservesa hardening rupee, crashing forward premiums, a low interest rate outlook, and excessive liquidity in the system. Indian exports that are dollar-denominated are the worst affected. Foreign Institutional Investors and Non-Resident Indians are investing heavily in the Indian money markets to take advantage of the interest rate differential and the falling forward premia. To see what's in store for India, read on.

Indians would have never imagined the rupee appreciating against the dollar. We have been seeing the rupee only depreciating against the dollar for the last twenty years. It had depreciated by almost 8% every year. It had reached a low of Rs. 49.12 in May 2002, and since then, the state of affairs reversed and now the rupee is poised to move only northwards. The rupee has gained over 10% since May 2002. It has gained almost 7.3% in the financial year 2003-04, of which 3.4% appreciation has come about in the calendar year 2004 alone. Though economists cite various reasons for this unprecedented phenomenon, most of them are agreeing with the view that this appreciation is more because of the slowdown in the US economy rather than the strength of the Indian economy. Whatever may be the reason (Box 1), the implications are interesting.

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