What drives the decline in rupee value? At the risk of oversimplifying, there are three factors. First, the value of the rupee generally tends to decline by the difference in the inflation rates in India versus the United States. Hence, if the inflation rate in India exceeds that in the US by 4 percent then the rupee will tend to decline by 4 percent, relative to the US dollar. As the inflation rates in the US and India do not fluctuate drastically, this factor is a robust predictor of the Rupee value. Also, the Indian rupee is only partly convertible. Hence, excess speculation is impossible.

Second, the extent to which the Indian government chooses to build significant foreign exchange reserves by absorbing foreign currency inflows, rather than paying off external debt, will support the rupee decline. The rationale here is simple. The more foreign exchange reserves a government has, the more stable its currency. With the RBI building up the forex reserves, the rupee is stable and has low volatility. Other currencies - such as the Turkish Lira, the South African Rand or the Argentinean Peso - have gone through wild swings due to predatory currency speculation. The Indian Rupee simply is not vulnerable to such external forces…thanks to the RBI's strategy of building high reserves! On the other hand, this is a conservative strategy as those very same forex reserves could be used to pay off foreign debt early or could even be used for untapped business/investment opportunities. That's the price we pay for a stable rupee! The interesting debate here is whether the Indian government should be more aggressive and less risk-averse in competing in the global markets. The pay-offs can be big…so can the risks. Conventional wisdom says that in times of more worldwide uncertainty, such as exists now, a more conservative strategy makes sense. But the big wins have always come during times of great uncertainty too!

The third factor is India's drive to become an export-driven economy. A declining rupee means Indian exports become increasingly competitive in the world marketplace. This is obviously a good reason for supporting a declining rupee. On the other hand, a declining rupee makes it progressively more costly to pay off foreign debt, as foreign currency becomes more expensive and tends to mask inefficiencies in domestic industry. Ninety eight percent of India's foreign currency debt carries long-term maturities, making the former a costly penalty. The latter happens, as the forces of globalization, via goods imported into India, tend to slow down as the local currency falls in value. Also, the invasion of the Indian marketplace by foreign companies that wish to set up shop in India, slows down as the profits realized by foreign companies in India decline with a falling rupee, unless they are able to either pass along the decline in rupee value to their customers or are able to garner enough volume. Kodak India Limited is a case in point. In 2000, they were able to raise prices to compensate for a falling rupee while, in 2001, the extremely competitive markets did not permit them to do so.

The Indian rupee is the slow and steady turtle compared to the wild and unpredictable hare . According to the script, the turtle wins the race. Isn't that a childhood fantasy script, though? You decide.

What does this mean for businesses and investors? It is much easier to predict the path of the turtle than that of the hare.

• Predictable rupee: Count on the Rupee declining around 3 percent in value over the next year

• Stable rupee: Count on the decline being gradual and stable with few wild swings

• Export-driving rupee: Count on the rupee being a key driver of Indian exports in the years to come

• "Strong" rupee: Count on the rupee being a currency able to fend off speculators

• Globalization-buffer rupee: Count on the rupee comfortably managing the globalization of Indian domestic industry (slowing and stabilizing the impact of foreign imports on domestic industry.)

Dr. Paul Prabhaker is a Professor of Marketing at Stuart Graduate School of Business, Illinois Inst. of Technology, with a Ph.D in Business Administration and a master's degree in Econometrics from the University of Rochester (NY). He also has an MBA from IIM Calcutta and a B.Tech (Mech) from IIT Madras.