So what does it mean by ” The Rupee has not devalued by the Dollar has strengthened”. It simply means the devaluation is not because of issues in the Indian Policies ( unlike Britain) but the strength of the dollar which has happened due to continual hiking of Interest rates.
This is amplified by a strong dollar index which measures the strength of the dollar against other currencies and this will continue till interest rates in the US peak out.
a) India is a partly convertible currency and direct quotes in other other currencies would only be possible only when we become fully convertible. This however is easier said than done since we are still a dependant economy on FII investments and may lead to outflow of capital in a crisis, say as it happened in 1997. 2008 was more of a sub-prime which hit the dollar per se.
b) The crisis today is created by the US in the first place. During the sub-prime, they invented the QE which basically meant printing currency notes to revive the economy, diregarding the risk of of inflation which was bound to follow. Now that Inflation has hit, they are resorting to interest rate hikes which is forcing the other countries to follow suit and ushering in a situation of competitive devaluation. India has to hike too or else it risks capital outflow.
c) As for India, this is a Hobson’s Choice. It has to hike interest rates even though its inflation is under control or else the differential to the dollar narrows down where overseas investors feel it is not lucrative enough to to invest in riskier countries. However, hiking rates risks slowing down growth and India has to slow down hiking rates.
d) India remains a net importer due to Crude and risks weakening as long as Oil prices strengthen. The reserves we have are just for that and RBI has sold enough dollars to keep the currency from sliding as weaker the rupee, more the Current Account Gap. Reserves, just like individual savings is for a rainy day and must be used in a crisis or it is of no use.
Indian economy has performed brilliantly in this world crisis and has impressive growth compared to even developed countries who are almost negative. However, todays world is very much interlinked and a country cannot perform in isolation however well it performs.
Compared to other countries, the currency has weakened much less and that also shows the resilience but weakening is but natural. Weakness of a currency also has nothing to do with national pride, it is just relative value. Infact, our currency has devalued much less compared to our neighbours with whom we compete in trade and it would be difficult to export and compete in pricing on similar products with them if we keep our currency artificially strong. The RBI thus is doing a wonderful job in slowing down the fall of the rupee and not trying to reverse the natural process.