Why the Indian Rupee is Strengthening vs. the US Dollar

1. The Indian economy is hot. You are getting alot of foreign direct investment. So people are selling their currency and buying yours. This strengthens the rupee. Its not just the dollar.
2. Your inflation rate is at about 5%(does not include housing). Not horrible, but higher than first world economies. This leads to higher interest rates. High interest rates lead to less people selling the rupee and buying other currencies.
3. In the past the Rupee was kept low, by the central bank and Indian investors buying US Government Treasury Bonds. These have low interest, but no risk. It's a good hege. However, since the Indian economy is growing so fast you have an opportunity cost(you can make more money investing in India) if you buy treasury bonds. In the past the Indian economy had a big risk factor, but not that capitalism is in full force, there is less risk so you don't need to be as conservative and buy US Bonds.
4. US Bond Prices are low because China is pooring money into bonds. This works out well for the US deficit and works out for US investors. All of the interest rates in the US are based off the the US Bond + some risk. So China buying lots of US bonds leads to low Mortgage Rates.
5. China does not have a democracy. It can force people and more easily invest in the US Treasury Bonds. China also pegs the exchange rate. They are able to have the peg because they force people to buy treasury bonds which balances out the exchange in payments. Basically the US trade deficit sends money to China. China takes alot of that money and buys Treasury Bonds. So basically we are paying for our TVs we get from China buy issuing federal government bonds.
6. There are 2 reasons why the US dollar is weakening. A huge trade deficit coupled with low interest rates(due to China buying tons of bonds). In the 1980s we offset our trade deficit with high interest rates. High interest rates drew alot of foreign investment to the US. Now that money can go to China, India and other developing countries since they have higher interest rates and faster growing economies. This leads to a weakening of the dollar.
Second, China is pegging their currency to the dollar. The Bush administration is letting the dollar weaken against other currencies BECAUSE the Yuan is under valued. If we strengthen the dollar vs. other currencies it would strengthen vs. the Yuan and hurt the trade deficit more. Basically if China floats the Yuan, the dollar will strengthen world wide to some degree.
7. The Europeans are pissed that the dollar is so weak. Its nothing to brag about. Our economy is stronger than theirs by ALOT (unemployment is 10% or higher in most EU countries) and our dollar is weak. Its because of China, but it really hurts their ability to sell to us.
Those are the reasons why the Rupee is strengthening vs. the dollar. It's also strengthening vs. other first world countries. Europe and Japan have enemic growth rates. So investors in Europe can get a better return investing in India. This strengthens the Rupeee. The Indian central bank can alleviate the strengthening rupee some. However, they don't have the cash reserves that China does so this would only be temporary. Also weakening the Rupee could spur inflation. So is it worse to have 15% yearly inflation or a strengthening rupee?
International exchange rates are not as straight forward as they seem. When I get home I'll post our textbook from the class. It was a great book.
If you have any more questions please post. BTW, this does not mean the rupee won't weaken since you can't predict the future.