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To increase the value of their currency, Government can try several policies to cause an appreciation.
1. Sell Dollar Assets and Buy Rupees.
It will appreciate the value of Rupee against Dollars. In the case the Govt. have relatively limited dollar reserves, there will be only limited scope for selling dollars and buying Rupee. .
2. Don't buy Dollars Assets further.
Govt. could appreciate the value of Rupee by simply by not buying any more dollar assets.
3. Higher Interest Rates
Higher interest rates would attract some ‘hot money flows’. Hot money flows occurs when banks and financial institutions move money to other countries to take advantage of a better rate of return on saving.
4. Stronger Exchange rate.
If the Govt. offer a stronger exchange rate, this will cause investors to buy Rupees. However, it will result in the appreciation of Rupee causing problems for exporters.
5. Long Term Policies
In the long term, a strong currency depends on economic fundamentals. To have a stronger exchange rate, countries will need a combination of low inflation, productivity growth, economic and political stability.
There is only one way to increase the value of currency, i.e. to produce more goods (or services) in the country. Like China, Japan or Germany did over the last few years.
