Strong Currency or Depreciation...

Strong rupee would lower domestic inflation since imports would be cheap... Domestic inflation would go down... INDIA is a net importer therefore strong inflows and strong rupee are likely to help reduce demand for foreign reserves and inflation and depreciation... However, cheap imports, lower domestic inflation could also increase demand for exports... It increases demand through internal devaluation because domestic price level might go down too due to cheap imports... Cheap imports could also make the domestic economy competitive in terms of low inflation and wage demand...

Depreciation is only a temporary approach to the problem of low exports and too much of it may engage trading partners'' in currency adjustments to reduce trade deficit... Exporters might try to increase competitiveness by innovation and other means to cut costs and prices... Lower wages too give INDIA a competitive advantage and labour intensive line of production except dear capital techniques might also be used to increase competitiveness... Interest subvention and tax holidays could help too...

Depreciation is often objectionable by the trading partners due to higher trade deficit... But, interest rate cut due to low inflation and then depreciation, indirectly, would not be directly objected... Depreciation occurs due to domestic rate cuts and more money supply and inflation... Lower borrowing cost would also increase export competitiveness, cost and prices of exports would go down... Adding to foreign exchange reserves unnecessarily, like China, and depreciation would still be opposed by the trading partners... Moreover, unless there are inflation and inflation expectations depreciation is not likely to work because nominal exchange rate would not increase and this time INDIA has low inflation and expectations because of higher unemployment and low growth... Inflation and inflation expectations increase only after full-employment... The US has increased money-supply indefinitely, but inflation and depreciation did not materialize because of high unemployment...