Falling Rupee: Implications

[Galaxy]

I always had different take on Interest rate.

What RBI Armchair economist fail to understand that there is very few co-relation between Interest rate and Inflation. It's theoretical and not practical approach.

Due to high interest rate, Corporates profit has decreased by 30% in FY11-12. Even high interest rate didn't helped input-cost / Inflation to come down. So, why to sacrifice 1%+ GDP growth and corporate earning ?

They should decrease the interest rate, CRR, RRR, RR by 100-150 bps point. That will itself help Inflation to soften. Also, If there will be better monsoon coupled with better governance (controlling Current account deficit), then automatically, Investors inflows will increase which will improve the currency valuation. IMO, fiscal consolidation should only be done through subsidy and gov. expenditure.

 

[Yusuf]

Interest rates in other countries range from 2-4%. It's what 14% in India

 

[cir]

I agree,except the last one,if you mean FDI.

Just as I refered, FII can not help India much. Only FDI can bring meaning jobs to India.

however, FDI needs the support of good infrastructure ,low cost literated labour and efficent Bureaucy.

many countries like Vietnam have better the above 3 factors than India.....

And inland CHina also has much better infrastructures , much more efficent bureaucy and much more skilled literate labout,,although labour cost in inland CHina is much more than India.
And remember that CHina has a much more complete and full industry chains than anywhere in the world..and it is quite important to industry activity.

in a word, in a race to attract FDI, the revials of India are not only countries like Vietnam,but also a huge one called "inland CHina"...

the city where I live is just one of hundreds of cities in inland CHina.

Do you have confidence that india can win a competition against such hundreds of CHinese cities?
http://defenceforumindia.com/forum/general-multimedia/35828-city-i-live.html

BTW, this weekend, I will go to the industry zone of this city,and I will post some pictures there .

Then, you can feel what the rival of India such a race is like .

Hello Jiangxilaobiao？

Jiangxi is one of the poorer provinces in China， and Ganzhou，with 8 so-called Impoverished counties，is one of the poorer，if not the poorest， prefectures in Jiangxi，which makes your home town among the lowest quarter of China's 333 prefecture-level administrative divisions。

 

[Galaxy]

Interest rates in other countries range from 2-4%. It's what 14% in India

You cannot compare developed country with Emerging markets.

Example: In US - Interest rate, Inflation and growth is 1%-3%, In India Interest rate is around 10% but GDP growth is 7% and Inflation is close to 10% too. Hence, it's no advantage. If Inflation reaches somewhere around 5%-6% and interest rate remains 10%, then it's advantage because then input cost will also reduce significantly which will translate into better earning numbers for corporates. Therefore, More inflows and consolidation of current account deficit and improvement in valuation of currency.

 

[badguy2000]

Hello Jiangxilaobiao？

Jiangxi is one of the poorer provinces in China， and Ganzhou，with 8 so-called Impoverished counties，is one of the poorer，if not the poorest， prefectures in Jiangxi，which makes your home town among the lowest quarter of China's 333 prefecture-level administrative divisions。

yes, it is for time being.....

however, in the past decade, Ganzhou also developed quite fast and huge change has taken place here....
Of course, the change here has not attracted much attention......., perhaps because other prefectures grew faster .....

I hope that Ganzhou may catch up with other more advanced area soon.

 

[mylegend]

In order to have stronger currency, you need to have a stronger fiscal health and improving trading surplus. You also need to have a lower inflation rate and higher interest rate by Central Bank. Unfortunate , India doesn't qualify much of those criteria. If those figure improve, currency should improve. The first step Indian government should do is to curb inflation and show better fiscal discipline.

Someone with better knowledge please help me understand better but I think the rupee sliding as it has been is going to create more problems in the long run.

One one hand the rupee is falling dramatically which is good for the export, but high inflation takes away from the PPP advantage that we have in dollar terms. Whatever the price of rupee, we will get adjusted to it. If the rupee rises and the inflation remains high, it will make us totally uncompetitive internationally and erode the PPP advantage that we have.

On the other hand, if the rupee stays undervalued, import costs will be high which means our oil import bills will remain high and keep cost of transportation high which will add to inflation.

It's a bloody vicious cycle.

What I have understood is that the falling rupee has not helped India in any way as far as exports go as we have hardly seen a boom in export. On the other hand, we have seen our oil import bill go through the roof an just today I have heard that a Rs. 5 hike on petrol and Rs. 3 on diesel is in the offing. This will increase the cost of food as transport cost will increase.

Problem is, RBI seems to be helpless in pulling back the currency and we may be doomed with an undervalued currency for a very long time. If the 55 mark is breached, we may see the rupee go all the way to 58.

We are looking at some tough times in the economy. sadly nobody seems to have a clue as to what to do about it.

 

[panduranghari]

Rupee slide even today is largely happening because of the eroding investor confidence in the stock market, and the trigger has been the Eurozone crisis and of course, the mess that has been created within by the government.

.

Quite right.

Very self explanatory I think.

 

[SPIEZ]

The first step Indian government should do is to curb inflation and show better fiscal discipline.

I agree with you there totally

 

[panduranghari]

Government inability and inaction combined with slowing growth and a widening Current Account deficit has prompted S&P to downgrade India's rating. At the same time the rating for countries like Indonesia and Philippines has been upgraded. Today, we are one of the least preferred emerging market for investors.


In addition, Due to high interest rate, low PAT, High Input cost --> Corporate result are in extremely bad phase. In FY11-13, Almost 30% earnings were lost! Our country is at cross roads today in policy administration and governance.

The sad part is despite commodity correction in last few months, inflation is still high because of the nearly 15% depreciation of the rupee over the last few months.

Therefore, Current Account Deficit is the key --> for that, We need FIIS's inflows --> for that, Investor friendly environment, good governance, better growth, normal interest rate --> If that happens then more inflows, Currency valuation will improve and inflation will decrease!!

Its a way from USA to tell India, allow FDI in Supermarkets, buy our jets etc. The day India does this, the rating will soar.

These ratings are meaningless.

USA is depreciating its currency to encourage exports. India does the same. Just because we are a developing economy, our rating is poor. How can spain, Britain, Italy have a better rating than India? they hardly manufacture anything and are so deep in debt. Just because they are not emerging economies, they have a better rating.

The implications for sliding rupee long term may be very high inflation. We are already double digits.

In India, the world's biggest annual bullion importer, gold jewelry plays a central role in weddings and festivals. But the precious metal's main appeal is as an investment favored by both rich and poor. India imported 933 metric tons of gold for private consumers last year, a 35 percent rise over five years and just under a quarter of global demand, according to the World Gold Council.

But the bustling business at jewelry shops is putting an increasing strain on India's national finances, analysts say, causing particular concern as the world's biggest democracy faces an economic slowdown this year.

For many Indians, the bazaar has had more appeal than the bank. Indian households' disposable incomes grew by 13 percent during the 2010-11 financial year, but the amount in their bank accounts rose by only 3 percent, according to official data. High inflation often renders the idea of financial savings unappealing, and many people in rural areas lack access to banks. Meanwhile, global economic uncertainty has boosted bullion prices. Gold today trades at about $1,540 per troy ounce, double its value since late 2008 despite a recent dip.

Yet India is struggling to balance its books partly because its citizens keep buying gold. The country's current account, the difference between the value of its imports and exports of goods, services and financial-transfer payments, is running at a deficit of about 4 percent, largely because of high import bills for oil and gold — India bought 969 metric tons of bullion last year at an overall cost of $48 billion. The lack of money in Indian bank accounts forces the government and private companies to borrow abroad, pushing the country further into the red.

"You're not looking at something sustainable. The balance of payments becomes very skewed," said Deepali Bhargava, chief India economist at Espirito Santo, an investment bank.

Moreover, many Indians buy baubles as a way to launder undeclared cash and keep their wealth outside the formal economy. The vast majority of sales occur in one-off shops known as family jewelers, such as those in Zaveri Bazaar.

India struggles to balance its books as citizens lust for gold - The Washington Post

 

[Ray]

Falling rupee isn't just pinching us, it's hurting all of us badly

Falling rupee isn't just pinching us, it's hurting all of us badly

MUMBAI: The rupee fell to a new low of 61.21 on Monday, raising the spectre of high inflation and threatening to throw government finances into disarray. A jiittery Reserve Bank of India (RBI) sold dollars and cracked down on speculation to bring back the rupee to 60.62 at close—up from 60.26 on Friday.

The rupee has depreciated almost 13% against the dollar since May and is the worst performing currency in Asia. The crash will be particularly painful for those who made plans for overseas travel or education in early May. In the short term it will hurt all Indians as businesses, including those in electronics and automobiles, hike prices to make up for the cost of higher inputs. General prices would also rise if the government chooses to pass on the cost of higher oil imports to customers. Given the potential for inflation, expectations of a rate cut from the RBI have vanished.

The rupee's weakening resulted from fears that foreign investors would exit emerging markets and invest in the US, which is showing signs of a faster recovery. With market expectations settling at 60 as the new normal there are fresh fears of the rupee slipping to 65 or more next year as reflected by trades in the forward markets. Bankers feel that the RBI will come up with further controls, such as restricting dollar purchases only for trade and directly selling dollars to oil companies. Unlike the dollar's surge in June the current rally is worrying the RBI as the US recovery has also triggered a rise in crude oil prices. Some feel that the government and the RBI need to ensure that the rupee does not slip further in order to stave off a rating downgrade. S&P has warned of a one-in-three chance of a downgrade.

"Over the next few months we see the rupee depreciating on the back of local factors as well as global developments. US data shows a strong recovery and US rates have already shot up significantly over the past few weeks. On the other hand, we are seeing weakness in Europe and slowdown in China. In this kind of an environment, emerging markets like India will experience outflows and the money will flow to US government bonds," said Arvind Narayanan, head of treasury and markets, DBS India.

Although the dollar's growing strength has hit all emerging markets, India is particularly vulnerable given that it has to fund a current account deficit that is 4.8% of its gross domestic product. This is the first time that the rupee has breached the 61-level; the previous all-time low was 60.76 on June 26. A weak opening was expected as a sharp drop in US unemployment sparked fears that the US Federal Reserve may discontinue its bond buyback through which it has been infusing $85bn every month.

"At present it is a very difficult call. In the short-term any news of further improvement in the US economy could cause the dollar to further strengthen and we cannot completely rule out a 60-63 range. But in the medium term there is scope for appreciation as all the bad news has been discounted and there is a likelihood that exports will pick up," said Ashish Vaidya, head of fixed income, currency and commodities trading at UBS India.

Falling rupee isn't just pinching us, it's hurting all of us badly - The Economic Times

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And on top of that the UPA wants to introduce fancy populist schemes like the Food security!

 

[Blackwater]

Re: Falling rupee isn't just pinching us, it's hurting all of us badly

its a temp phase. rupee deliberately weeken the ruppee to attract FDI

 

[Ray]

Re: Falling rupee isn't just pinching us, it's hurting all of us badly

its a temp phase. rupee deliberately weeken the ruppee to attract FDI

The Inflation was also temporary and it remained temporary for so many years.

The Govt has lost its bearings!

 

[pmaitra]

Re: Falling rupee isn't just pinching us, it's hurting all of us badly

Falling rupee hurting us? The IT giants won't agree.

 

[Ray]

Re: Falling rupee isn't just pinching us, it's hurting all of us badly

Falling rupee hurting us? The IT giants won't agree.

Sadly, the elite only thinks of big business profiting.

While the common man shoulders the burden and then die!

 

[pmaitra]

Re: Falling rupee isn't just pinching us, it's hurting all of us badly

Sadly, the elite only thinks of big business profiting.

While the common man shoulders the burden and then die!

The naked truth is, it is not only profiteering, but actually stealing from people's savings accounts, by lobbying the government to print more money (read counterfeit money), so as to keep inflation going, and keep the Rupee weak. The Reserve Bank of India is a willing accomplice in this counterfeiting business.

 

[TrueSpirit]

Re: Falling rupee isn't just pinching us, it's hurting all of us badly

Falling rupee hurting us? The IT giants won't agree.

That's an ephemeral benefit. Contracts are likely to be re-negotiated.

For NRI's though, it is definitely party time isn't it..

 

[TrueSpirit]

Re: Falling rupee isn't just pinching us, it's hurting all of us badly

The naked truth is, it is not only profiteering, but actually stealing from people's savings accounts, by lobbying the government to print more money (read counterfeit money), so as to keep inflation going, and keep the Rupee weak. The Reserve Bank of India is a willing accomplice in this counterfeiting business.

Basically, it is to help the govt. in servicing existing debts raised from the market. A vicious circle. Stagflation is likely to stay.

 

[TrueSpirit]

Re: Falling rupee isn't just pinching us, it's hurting all of us badly

its a temp phase. rupee deliberately weeken the ruppee to attract FDI

FII's have already exited....Walmart & Ikea entry is suspect now...

How does the GoI expects FDI to come when structural deformities in economy are being ignored & extremely debstabilising & unsustainainble freebies like Food Sec. Bill imposed on the nation ?

 

[TrueSpirit]

Re: Falling rupee isn't just pinching us, it's hurting all of us badly

Sadly, the elite only thinks of big business profiting.

While the common man shoulders the burden and then die!

Sir, trickle-down effect from "big-business profiting" does helps common men, in form of increased compensation, leading to increased purchase power, implying higher domestic consumption, leading to more demand & basically achieving economies of scale in the longer run.

However, the "trickle" is minor in India's case & benefits only a minor section of our society.

Further, the shoddy delivery-mechanism of leakage-prone distribution system (driven by a calamitously populist govt.) ruins the economy for good.

 

[parijataka]

Re: Falling rupee isn't just pinching us, it's hurting all of us badly

Interesting blog post.

The Great Indian Rupee Trick

This piece is not about how the economy is tanking. That is a known phenomenon and I wrote about it in my previous piece here . Well that was around 8 months back. There was no doubt in my mind that the economy was in serious danger and the US Marines were unfortunately not there to come to the rescue, unlike the themes of several movies seen by me in my formative years.

Here this is about how our currency, the Indian Rupee is just poised on quicksand and all the inflation that we have been tolerating so far is very likely to come back to bite us right on our collective backsides. In Jan 2000, the CPI was around the 90 mark and in Jan 2004 it rose to 104. . However, the rate rose sharply from 2008 onwards and went from around 125 straight to 220 in all of 5 years.

Here's one more statistic showing how our external trade position has fared.

Just below zero in 2004 and then it started getting more and more adverse. We are now having a trade deficit of close to 1000 Billion rupees or in USD as on date, it is around USD 18.62 Billion. Please note the sources from where these stats have been taken, before you accuse this Jan Sanghi of fudging statistics to show the Govt. in bad light.

Let us see how exports have fared -

Not bad one would say till you see this one: -

And this has got progressively worse in 2013. No matter what you are told about easing in percentage of CAD to GDP, there is merit in believing the worst.

Why oh why is the Rupee seeing its worst days against the US dollar? The answer lies in two factors that you need to see, one is the relative rates of inflation, which determines rates over a longer time horizon and the other is supply and demand in the market for dollars. As you will see in this piece written at the time of Budget 2013-14, we are dependent on foreign inflows in the form of FII and FDI to keep the rupee afloat. All very well, except that there seems to be no reason for the world to support the INR. So when the collective thought of investors is to seek alternative avenues for investment rather than India, as they did by exiting Govt. securities and the stock markets, to a lesser extent, the Rupee just tanked shocking everyone. Shocking, hardly I would say. We should have seen this coming. A house built on a sandy foundation with no support will collapse. One cannot ignore economics entirely and expect that there will be no consequences.

One of my Gurus, Mr A.V.Rajwade made this perspicacious observation here in May this year: -

"AV Rajwade: Again I am taking a longer view and yes I think that our belief that we are an exception to every rule is a wrong belief. We cannot keep on living on others' money forever. Nobody can, nobody has. Nobody has ever grown fast based on capital inflows. These are facts and I do not believe that we are an exception to this basic rule what we have seen in the last 70 odd years in the global economy.

The question is what kind of time horizon money is looking up? As I said our current account deficit is horrendous, there are few signs that there is going to be a significant improvement. Trade number for April was bad and that is likely to persist, iron ore exports have gone down, coal imports will go up. I would believe that in the medium term the rupee's fate is going to be decided far more by the competitiveness of our tradable sector, not on what happens to the dollar index or what happens to the dollar yen rate or whether there is risk on or risk off and so on so forth. Those are essentially for traders and I am not a trader in currencies."

The markets react on a short term basis but eventually settle into sanity once the exuberance is over. This will happen soon.

The Rupee's fate is only a symptom and not the cause. It has tanked only because of the mismanagement of the economy by the UPA, mainly the congress. One of the factors that affects exchange rates is the differential of inflation. The differential of inflation between the USA and India is roughly 8% p.a. since around 2009. This would affect the Indian rupee directly, if the rupee were a freely traded currency on the capital account. However, since the Rupee is traded only within India for the greater part, it is governed by supply and demand. At present demand is greater than supply because more USD is remitted out than coming in. Our exports need to go up substantially and the imports need to be brought down so that we can see a strengthening of the rupee organically. The paradox is that thanks to the mismanagement of the economy, the Rupee should be around Rs 75 to the dollar, based on relative inflation of the USA and India. Our exporters are a resilient lot and will settle for sales proceeds at Rs 60+ to the USD and we can see some short term increase in exports with a slight lag. On the imports side, there is a need to identify what we don't really need and stop these imports. Is there any reason for us to import apples and oranges? Or soft toys? We must ruthlessly stop nonsensical exports and see how to improve supplies from within. This will result in an internal surplus that will also affect the external deficit in a positive manner for the country.

It's a pity that the UPA has, for short term electoral gains, reduced our people to a set of wimpy freebooters. Hopefully we will see a new dawn soon and find India on the path to greatness. But that seems to be at least a year away and the path thereafter will include tough and politically unpopular decisions. Well, I can dream!

Coming back to the Rupee, I am of the strong opinion that we will see a big depreciation once again because our economy, at least on the forex side, is floating on a sea of hot money that will just evaporate. How much of our reserves are real and durable reserves of a medium to long term nature, and how much is made up of volatile flows is not clear. Our people have lost faith in the Govt. and banks, and are moving away from deposits as their mainstay. While Gold has stayed down, it will not be long before it starts rising encore. Wait till Deepavali for that. Also when people lose faith in the economy they gravitate towards gold. There are some people like me who have only a limited happiness in seeing the dollar rise. I am well aware that purely in a selfish way, it is nice to get that much more for each Dollar I remit, since I work outside India. Overall, however, I would prefer to see a situation where the Rupee starts appreciating once again on the back of good export performance and the govt. is able to trim down imports.

Finally, here is why I believe that the Rupee will tank further and stay low for a long time: -

1. No FDI is coming, regardless of the noise made by the #PaidMedia and the dishonest Govt.

2. The trade deficit shows no sign of decreasing as the imports exceed exports by a good USD 20 billion or so every month

3. Oil has just touched 100 and will only increase as winter sets in and demand increases. So unless, the oil companies have booked forward at a good price, we have to deal with the reality of higher oil prices.

4. Sooner rather than later, the India story will wither away, thanks to high fiscal and CAD and plain mismanagement and scams, and it will be very difficult to resurrect it. The consequence would be a flight of capital with a deleterious effect on the Rupee.

Well, the people have voted for a 'subsidised' life with Bharat Nirman and FSB and NREGA. The results are there for all to see. Where are we headed? To a hellish life made more hellish by runaway inflation, a Rupee tanking and looming food shortages as farmers find no labour to help in sowing and harvesting their crops and a whole generation bred on freebies.

We have one hope and he will come in on the back of huge expectations. But I am sanguine that he will assemble a crack team that will take unpopular decisions in the short term to ensure a long term surplus for all of us. If we have UPA3, kiss the idea of India Good Bye!