The currency appreciation is mainly as a result of capital inflow from FIIs, FDIs and ECBs. To counter that RBI was mopping money and injecting liquidity. But, this causes inflation. The best way to fight currency appreciation is to do the reverse of FDIs and FIIs - encourage more Indian companies to buy overseas assets and companies.
So, the big problem now is how to deal with billions of dollars that come every week, while already holding a $200b worth reserve. Why not encourage more companies like Tata that bought Corus thereby causing an outflow of dollars? India should encourage its PSUs to buy more oil fields, mines and other assets abroad along with guided value purchases that will bring India better practices and more potential for intra-company exports. This will bring as much benefit as incoming-FDI, while keeping rupee lower.
For this to happen, we need to evolve a national policy and bring low-interest dollar loans for the companies to make valuable purchases abroad that will benefit everybody.
