RBI purchase of Dollars to stop the strengthening rupee: Justified?
The rupee is appreciating or rather I should say, it is the dollar that is weakening (due to heavy quantitative easing i.e., dollar printing by the US Fed) against the major currencies of the world including Indian Rupee. Strengthening rupee is being closely watched by Indian government, particularly by the RBI officials, and the business people. All kinds of discussion is surfacing on the table. The focus of all these discussion is on, whether Indian government - through RBI's purchase of US dollar - should try to tame the rising rupee against the dollar? Actually, RBI has already started taming the rise in rupee by intervening in the currency market through their purchase of US dollars last Thursday . Is this RBI dollar purchase and rupee weakening policy justifiable from the sound economic perspective? To answer this crucial question we first need to understand the fundamentals of the currency market. What determines the exchange rate of rupee against the other currencies? The e