The International Monetary Fund (IMF) views the rising rupee as reflecting the strength in the Indian economy, amongst the world's fastest growing economies with one of the highest rates of productivity growth in the region.
"The basic question one has to ask is: why is it that the rupee is appreciating?" a senior IMF official said Monday in a conference call on India's bilateral annual consultations.
"We look at the rupee in what's called real effective terms, which is adjusted for the difference in inflation between India and its partner countries, and that's up seven to eight percent over the last year or so, which is a significant figure," he said.
"It has very excellent prospects in terms of growth, a very strong corporate sector. It's shown a significant degree of resilience."
However, IMF has one concern over Reserve Bank of India's (RBI) policy response.
The RBI "intervention is basically aimed at smoothing adjustment in the exchange rate. That is, India maintains a managed float regime", Charles Kramer, division chief in the Asia and Pacific department, noted.
"One concern with the intervention is its cost. When the RBI intervenes or when central banks intervene, generally, they accumulate foreign exchange assets. Carrying those assets has a cost.
"While the cost isn't very high right now, eventually the cost could increase. In an environment where the authorities are trying to make progress in making space on the fiscal side, that could be undesirable," he said.
On the issue of capital inflows, Kalpana Kochar, senior advisor and mission chief for India in the Asia and Pacific department, said India was not unique in facing capital inflows, but it was something that they are having difficulty coping with. "The fact is that India has been enjoying large capital inflows, which we believe to be at least partly the result of the fact that there's a strong growth story in India and investors are looking to take advantage of this, of the returns that they see coming from India," she said.
Another part is due to interest rate differentials between India and the rest of the world - certainly the advanced countries. In any event, capital inflows are large, Kochar noted.
IMF had discussed with India whether or not there were any adjustments to the policy framework that would allow them to cope better with this situation while recognising that it is, in fact, a challenging situation.
It had also discussed ways in which the financial sector could be strengthened to prepare better for these larger capital inflows, "of which we believe much of it is here to stay, reflecting the strength of India's economy", she said.
Asked how critical the problem was, Kochar said: "India is plugged into the world trade system, but India's exports have been diversified both in terms of goods as well as markets with far less reliance on the US than for many other countries.
"On service exports, for which of course the biggest destination is in fact the US, we don't have a whole lot of strong evidence but we do believe that the impact could go either way," she said.
"If, in fact, US corporates are looking to cut costs, it could be that they outsource more, and so India could benefit from that. If not, you could see a bit of a slowing in service exports. So, overall, on the spectrum of countries that are likely to be affected by this crisis, India is probably a bit further down. It is just our views on given the structure of India's economy and its exports and financial markets, at this point, we don't anticipate having huge effects," Kochar said.