History's burden can sometimes be truly heavy. Last month, a leading diamond exporter finally resolved a six-month-old dilemma. A substantial part of his earnings was held overseas in a dollar account. Every fact-sheet he studied and everyone he spoke to advised that the rupee was a better currency to hold his assets in. But he just couldn't believe it. After two decades of watching the rupee slide one way, reconciling to an appreciating rupee was tough. Eventually he did move the money into India.

Perhaps it was the uncertainty of the war in Iraq or maybe it was karmic acceptance of the new reality. In the past 11 months, the rupee has been rallying against the dollar. Since May 16, 2002 the rupee has gained 3.7 per cent and appreciated from Rs 49.11 to Rs 47.35 per dollar. For most global economies, the appreciation of a currency is as routine as its depreciation. Not for India, where "the rupee has been on a one-way street-down" since Independence, says S.K. Shelgikar, adviser to the Videocon Group.

Indeed, Indian businessmen have been habituated to multiplying a given figure by 0.11 and adding it to the original figure to arrive at the almost guaranteed 11 per cent depreciation in the 1990s (and 5 per cent in the last few years). As recently as a year back, no corporate would leave a dollar exposure without hedging it and the forward premia (the rate at which dollars could be bought at a future date) ranged around 6 per cent. Not anymore. Last month, forward dollar premia plunged below 2 per cent, which means the market does not expect even a 2 per cent depreciation.

That's quite a turnaround for the Indian currency. As K.S. Gopalswamy, head of asset and liability management, global markets, Standard Chartered Bank, points out, "Last year, if you told exporters that the rupee would appreciate, they would have laughed you out." Interestingly, the rupee has depreciated 10 per cent against the pound and over 24 per cent against the euro between May 2002 and April 2003. But that hasn't caused much worry probably because over two-thirds of Indian exports are in dollars. In fact, such is the confidence in the rupee that Indian corporates are estimated to have an exposure of over $6 billion uncovered while importers have virtually stopped covering future spend. As currency risk management consultant A.V. Rajwade points out, "This is a paradigm change."

Sure, the timing of the rupee's rise could be attributed to a combination of geopolitics and economics. A slowing US economy, war clouds, a weak dollar (which has depreciated against major currencies) have all helped in the rupee's rise but that would be lazy analysis. The rupee's rise is not a lucky break or a temporary blip. It is backed by an ingenious accumulation strategy-using inflows to stabilise the rupee economy-authored by Reserve Bank of India Governor Bimal Jalan. In fact, through Jalan's tenure, forex reserves have risen from $25 billion in 1997 to over $75 billion today.

And this war chest, according to international rating agency Moody's, has reduced India's external vulnerability. It has virtually immunised the external front from shocks. There has been an accretion in reserves by way of NRI deposits, thanks to the arbitrage opportunity available. NRIs can leverage funds borrowed at around 2 per cent and park them in Indian banks at around 6 per cent. But that is just a part of the story.

If the rupee is stronger today it is due to a fundamental change in the Indian economy. "Indian manufacturing," says Ajit Ranade, chief economist, ABN Amro Bank, has acquired "global cost competitiveness." Add to this its ability to leverage skilled manpower to deliver services across the globe and you have a stupendous growth in inflows. Since April 2002 it has added $25 billion-including $14 billion in repatriations and $10 billion in software exports-rendering India into current-account surplus (inflows exceed imports) economy. For a country that didn't have reserves to pay for a week's imports, India now adds an average $2 billion to its reserves every month.

Such is the confidence that in the last three months, India has prepaid high-cost loans worth $3.5 billion and plans to retire another $3 billion of debt this summer. And that really is proof of the sustainability of the fundamentals. Y.V. Reddy, executive director, IMF, believes the rupee "will continue to be a stable currency maintaining a realistic value consistent with economic fundamentals". Siddharth Mathur, market strategist, JP Morgan, agrees: "While a post-war dollar rally might cap the rupee's rise, continuing current account surpluses, unchanged interest rate differentials, improving foreign fund flows, a weaker dollar and the large war chest of reserves will support a stronger rupee."

It is a reality that corporates have woken up to. A large corporate house has revived its plans (shelved last year) to acquire a software company in the US, thanks to a stronger rupee. Companies are borrowing in dollars at 100 basis points above Libor (the prevailing bank rate in London) or at around 3 per cent a year. Even after covering the exchange rate risk, their cost is under 6 per cent compared with rupee loans at over 9 per cent. Some are even swapping rupee loans with low-cost dollar loans which will not only beef up bottom lines but also help cut costs to sustain the low inflation regime that has helped the rise of the rupee.

Of course, a strong rupee can be a threat to some corporates as it makes imports cheaper. But Anand Mahindra, vice-chairman and managing director, Mahindra & Mahindra, believes it is a challenging opportunity. All set to unveil the second tractor plant in the US, Mahindra says this "is a good time to shop at fire sales abroad to acquire technology and capacities. This is the time to add capacities and build up competitiveness to capture global market share. When the global economy picks up you could be on the gravy-train."

Exporters and Omkar Goswami, chief economist of the Confederation of Indian Industry, worry that a stronger rupee will "erode margins and competitiveness". But this worry flies in the face of a 20 per cent growth in exports in 2002-3 even as the rupee appreciated. Part of the growth could be explained by the depreciation of the rupee against the euro and the pound but it also points to India's growing competitiveness. Clearly the gap between local cost and international cost is enough to absorb appreciation of rupee and compete for market shares.

In fact, Rajwade believes India's export potential is just about to bloom-both in services and manufacturing, including new areas like healthcare and pharma research. Gopalswamy adds education and tourism to that list. There are also emerging opportunities in textiles where India could earn as much as $10 billion in the post-quota era and in pharmaceuticals and auto ancillaries (already a big contributor). Clearly, the rupee's rise is not only real and sustainable but also one more signal for policy makers to get their act together. They need to fix the fiscal mess and create the policy environment to unleash the entrepreneurial spirit in Indian businessmen. India is off the one-way street but it would require policy boosters to get onto the expressway.