Strong rupee: best time for a holiday abroad.

"Rupee strength is unjustified," wrote Anantha Nageswaran. Why so? Because the rupee is being pushed by foreign investors pouring money into Indian equities and bonds. "Strong capital inflows do not constitute 'sound economic fundamentals'. They are hardly mirrors to fundamentals but they reflect investors' perceptions, and that too of the relative variety. So too the exchange rate. India's economic growth is middling. It is unbalanced. Private capital formation is still missing. Savings rates have not risen. But the trade deficit is rising." Imports increased by 49.1% in dollar terms and 44.7% in rupee terms in April, compared to April last year and, although exports also increased, the trade deficit was 173.5% higher compared to last year. That is because we manufacture very little and the strong currency makes imports cheaper than products produced locally. Our trade deficit has been helped by low oil prices and because other countries, like China, are resisting depreciation of their currencies. On the other hand, Ashwin Ramarathinam thinks that the strength of the rupee is because of the strength of the economy. There is political stability, the current account deficit is low, inflation has fallen and the economy is expected to grow. According to Kunal Bothra, going by past experience, the rupee will appreciate to below 58 to the dollar in the next 12-18 months. One reason for the strong rupee is that interest rate is high relative to inflation. Retail inflation fell to 2.99% in April, well below the RBI target of 4%. However, inflation expectation has risen to 8.8% and the collapse in food prices, consequent to demonetization, will not last, said Pattnaik and Rattanani. Foreign investors are pouring money into Indian bonds because of higher returns and a stronger rupee increases their profits when converted back to their own currencies. While hot money is flowing in, remittances from Indians living abroad has fallen by 8.9% last year, according to the World Bank. But it is not all foreign investors, domestic investors are pushing up stock prices through mutual funds. Despite that foreign investors hold nearly 40% of our stock market. Normally the RBI could lower interest rate to make bonds less attractive to foreign investors and buy dollars from the market, but it is restricted by the huge liquidity unleashed by demonetization and the fear of rising prices once notes come back into circulation. Buying dollars will release even more rupees into circulation, when it is struggling to reduce money supply, and a weaker rupee will make imports more expensive and raise inflation rate. Whatever it pros and cons a strong rupee is definitely good news for those holidaying abroad. Enjoy while it lasts.