Abheek Barua has a sensible article in Business Standard where he talks about the long-term forces and immediate exigencies which have given a decline in the US dollar against numerous other currencies, with a continuing gloomy outlook for the USD in the days to come.
As he correctly points out, the recent INR appreciation should be seen in this light. If the USD is losing ground, pegging to the USD and insisting on an unchanging INR/USD rate involves forcing a depreciation in the INR.
The other implication of the weak outlook on the USD is that India must avoid holding USD, in order to avoid losses on the reserves portfolio. These losses are an additional fiscal cost of the present exchange rate regime.
Glancing at the data shows that the trade weighted US dollar (for major currencies) has dropped from 100 to 77.6 between Jan 2003 and Jul 2007. Similar results are found for the broad index. This was, unfortunately, a period where India was holding a lot of USD (though one can't know how much owing to poor transparency at RBI). We could have built a few thousand kilometres of highway using these losses.