Indian goods are becoming more expensive in US, and the American goods are becoming cheaper in India. This is in the light of the rupee surging ahead against the dollar for past few months. There are varied reasons for this behavior of the rupee. Certainly, the rupee's rise would have a pronounced effect on the country's Balance of Payments position. Also the increasing foreign exchange reserves and the current account surplus have become a matter of concern to the economists. To know the reasons for the rupee's rise and its implications on the BoP, read on.

Rupee's appreciation can be attributed to weakness in the dollar, invisible inflows from NRIs, surge in forex reserves, and decrease in forward premia in comparison with the spot rates. Owing to the absence of full-fledged capital account convertibility in India, the exchange rate is still a function of demand-supply conditions of dollar in the market. Gloomy economic trends in the United States, the huge current account deficit, frequent cuts in the interest rates by the Federal Bank have been major causes for the dollar weakening against all the major currencies.

Revival of India's economy and revived trade with its trading partners are making India a suitable avenue for foreign investments. In this context, it is vital to consider the arbitrage conditions in India and the US. Most of the NRIs borrow dollars cheaply in the US and lend them at higher rates in India. This activity infuses a dollar influx into the economy. Though there is a heavy dollar influx into the country, low investment levels in India resulted in low investment demand for dollars, so that their supply exceeds the demand. In such a situation, it was inevitable for the RBI to buy the surplus dollars, leading to the accretion in reserves. The net purchases of dollars steadily increased from September 2002. RBI carried out this buying of dollars until it ran out of the rupees. (Table 1) consequence, now the rupee has begun to appreciate rapidly.

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