It seems like the rising cost of Bangalore software engineers is encouraging firms to produce more software in the US.
Part of the (large) increase in the relative salaries of Bangalore software engineers reflects industry-specific demand. There are only so many IIT graduates out there.
But part of the increase reflects the rise in the rupee's real value. The rupee has appreciated in nominal terms -- particularly in 2007. And Indian inflation has been higher than US inflation, leading to a significant real appreciation.
In some ways, China and India are very similar. India’s household savings rate, for example, is quite high – actually higher than China’s household savings rate (per Kuijs). India is also experiencing an investment driven boom that has pushed its growth rate up. Indeed, one of the big questions in India is whether India can sustain its current (high) growth rate. Both the PBoC and the RBI have intervene rather consistently in the fx market, though the RBI is by no means as active as the PBoC.
But there are also important differences. India generally has run a modest current account deficit (India ran a small surplus in q1 on the back of lower prices/ strong export growth, but looks likely to swing back into deficit in q2). And India’s success has led the rupee to appreciate in both nominal and real terms – as one would expect. China is rather different. The RMB is still well below its 2001 level in real terms, and China exports about four times as much now as it did then and has a much, much bigger external surplus.
However, even in India there are limits. The government let the rupee appreciate from 44 to 40 – but right now, it sure seems to be holding the line at 40. Its intervention has stepped way up over the past four weeks. The RBI added over $3b to its reserves in the last week of May, and has bought $1-$1.5b every week since …
Pressure from exporters exists in India as well as China, though the interests that benefit from exports and artificially low domestic interests to help limit pressure on the currency do not seem to have captured Indian policy in the same way that they have captured Chinese policy …
Appreciating against the US is one thing. Appreciating against China is quite another. Perhaps less for India, with its software industry, than for some other Asian economies that compete more directly with China. But even for India, given its aspiration to other a credible alternative to China in a range of manufacturing sectors. Consequently, I rather suspect that additional rupee appreciation that came in conjunction with a broader move in all Asian economies would be more politically acceptable than rupee appreciation in the absence of a broader move.