Indian Rupee depreciation against Dollar

[Yusuf]

US complains about China. But Rupee is overvalued big time. The increase in Repo rates, forcing investors out and reduction of FDI reserves is all aimed at artificially keeping the Rupee overvalued. Helps exporters, not importers.

Yusuf, I heard Rupee is overvalued by 40%, not by the amount you say, but I am not 100% sure.

I remember reading that about 2-3 years back I think.

Anyways recent links for rupee being undervalued.
Rupee most undervalued currency in the world: Big Mac index - Economic Times
Financial Express Mobile
Indianexpress Mobile- Do we need an undervalued rupee?

 

[Yusuf]

If rupee is overvalued by 40%, then India's economy in PPP terms is less than $ trillion.

India is going to touch 5 trillion in PPP terms so how will it go below 1 trillion.

Nominal GDP which really matters will increase if the currency appreciates.

 

[cir]

India is going to touch 5 trillion in PPP terms so how will it go below 1 trillion.

Nominal GDP which really matters will increase if the currency appreciates.

that's assuming rupee is way undervalued。 if not，as the member seems to suggest， then India's GDP in PPP is way below its reported nominal figure（some 1.7 trillion US dollars in FY2010-2011）

 

[cir]

A repeat of the 1997 South East Asia financial crisis？ It all started with the sudden and rapid depreciation of the Thai baht。 Never say never！

Re falls to a record low of Rs 53.29/$

The Indian rupee tumbled again by 35 paise to an all-time low of Rs 53.29 per dollar in early trade on the Interbank Foreign Exchange on Tuesday.

This resulted from continued demand for the American currency from banks and importers, coupled with news of negative growth in industrial output.

Dollar gains against other currencies overseas amid euro zone debt concerns also put pressure on the Indian rupee.

The domestic currency had tumbled by 81 paise to close at a record low of Rs 52.84/85 per dollar in the previous session on strong demand for the American currency and strengthening of the dollar against its rivals overseas.

Meanwhile, the Bombay Stock Exchange benchmark Sensex fell by 60.98 points, or 0.38 per cent, to 15,809.37 in opening trade on Tuesday.

On Monday, the rupee hit its lifetime low of 52.84/85 against the dollar as demand for the US currency soared amid signs of foreign institutional investors pulling out money following negative growth in industrial production in October.

Forex dealers said a slew of measures like plunging stock markets, dollar gaining strength against its rivals in the overseas market weighed against the local currency which lost a whopping 81 paise against the Greenback on Monday.

 

[Galaxy]

I dollar = Rs. 53.27 Unfair!

 

[trackwhack]

Time for the RBI to start dumping US treasuries in the open market. Dump 10 billion in treasuries and by 200 more tonnes of gold from the IMF.

 

[Yusuf]

Rupee hits all-time low at 53.30 to US dollar

Crucial reforms not coming through. Political opportunism at its peak. Economy is suffering.
Industrial production has fallen by 5%. Negative growth for the first time since 2009. Drop in rupee has not helped exports either.

I hate Anna, I hate the political opportunists. It's better to grow at 10% under corruption than decline under transparency.

 

[pmaitra]

I remember reading that about 2-3 years back I think.

Anyways recent links for rupee being undervalued.
Rupee most undervalued currency in the world: Big Mac index - Economic Times
Financial Express Mobile
Indianexpress Mobile- Do we need an undervalued rupee?

Posting the last link and discussing:

Do we need an undervalued rupee?
Posted: Fri Oct 15 2010, 09:59 hrs

As the rupee has appreciated in recent months, the calls for RBI intervention have become increasingly shrill. I don't have any real problems with such calls except when they are based on faith rather than reality.

The underlying belief is that an appreciated currency is bad for exports. It is, but does this matter materially for India? India's exports rose from 12% of GDP in 2003 to 25% of GDP by 2008. While exports doubled, the rupee went through significant volatility. And it did not matter, because much of the growth in exports was driven by productivity gains in manufacturing and services, not because the rupee was undervalued. Indeed, if one looks at the categories of goods and services exports, except for BPO exports, none are statistically affected by exchange rate changes. Instead, changes in external demand have very large impact on all categories. And this includes textiles, leather, gems and jewellery, the supposedly low-margin and high-employment generating sectors! So what does the intervention do? It doesn't have any impact on employment in the exports sector; it just fattens profit margins. Do fat profit margins encourage more investment over time? Probably, but no one in the pro-intervention camp has provided any shred of evidence of this. It is just faith.

We can practice faith-based economics, but there is the small matter of the cost of intervention, something the pro-intervention camp rarely talks about. Interventions can control the nominal exchange rate, but what about the real exchange rate, which is what really matters for exports, growth, employment and all the other good stuff. Unlike purists, I think they can in the short run, as prices are sticky and for an extended period if the liquidity injected by the interventions is sterilised.

Sadly, there are no free lunches. First, there is the direct fiscal cost as typically the interest earned on the FX reserves is less than the interest paid on the sterilisation bonds. In the 18 months from March 2007, when RBI intervened to the tune of Rs 1.8 trillion, the negative carry was around 5%. Roughly Rs 90 billion, and about 20% of NREGA! Add to this the indirect cost on the budget and the economy of the sterilisation bonds raising overall lending rates. Not to mention encouraging large speculative inflows on the expectations of further appreciation and setting off a vicious cycle of intervention, sterilisation and inflows, until the exchange rate was let go.

I am quite certain that RBI will intervene in the coming months as the IPO-related inflows surge. Such interventions are justified as these inflows are lumpy and can disrupt the market. But persistent interventions targeting a particular level of the exchange rate should be avoided. It is costly and rarely works. Undervalued exchange rate is an addiction (just look at our neighbouring country). Over the last 18 months, RBI has put us on a detoxification course by limiting interventions. Let's not restart the bad habit.

The author is India chief economist, JP Morgan. Views are personal
Chandrajit Banerjee

India is often clubbed with other emerging economies when it comes to financial markets, including currency markets. Financial markets treat emerging economies as an asset class so that ups and downs in these markets get synchronised. But India is different from many developing economies in one respect—it has a current account deficit. In particular, developing countries in the Asian region by and large enjoy current account surpluses due to their success as export-led economies. According to economic theory, countries that run a surplus should experience an appreciating currency while countries with a deficit should see their currency depreciate. The exchange rate then acts as an equilibrating mechanism.

But this is not what happens in reality as capital inflows impact exchange rate movements. Therupee appreciated over 10% against the dollar during 2009-10 despite the deficit widening by over $10 billion. This trend continues, driven by the perception that growth prospects are stronger in emerging markets like India. Ironically, it is these currency movements that have become the biggest threat to India's growth. In a liberalised environment, Indian businesses need to compete both in the global arena as well as at home. Competitive disadvantages like a strong currency have become a major hurdle to increasing our export share or in competing with a flood of cheap imports. This is especially hurtful to SMEs that work on thin margins.

India's low-cost, labour intensive SME sector contributes nearly 40% to total industrial production, accounts for nearly 35% of exports and provides employment to over 30 million people in over 12 million industrial units. Its presence is overwhelming in sectors like textiles, engineering goods, pharma and processed foods. With globalisation, there is a need to integrate into regional supply chains and attract investment in sectors where more advanced countries are losing competitiveness. It will be a pity if an overvalued currency in India leads investors to choose alternative locations for their investments.

RBI data shows that the appreciation of the rupee against a basket of six major currencies has been strong. Between April 2009 and 2010, the nominal effective exchange rate of the rupee increased by 11%, with some moderation thereafter. Even more worrying is the appreciation in real terms. Inflation in India has been higher than in other countries over the last year. Its currency should, therefore, have been depreciating to offset the rise in costs. Instead, the real effective exchange rate increased by over 20% during the same period. This will certainly hurt the competitiveness of Indian industry, slow down the growth process and widen our current account deficit. While it is the stated policy of RBI that an artificial valuation of the rupee would not be done by the central bank, a pragmatic approach to the valuation certainly merits consideration by policymakers in the overall interest of the economy, not to speak of the interest of the hundreds of thousands of people employed in sectors with high export dependence.

The author is director general ,CII

Now, questions are:

"As the rupee has appreciated in recent months, the calls for RBI intervention have become increasingly shrill."
Who are the people or entities lobbying for RBI intervention, especially when the Rupee appreciates? Who interests are they serving? Are they only concerned about their own pockets?

"The underlying belief is that an appreciated currency is bad for exports. It is, but does this matter materially for India?"
If India was exporting more than it was importing, overall, then the Rupee would not have been sliding against the US$ or Euro. Even if in Rupee terms appreciated currency is bad for exports, how difficult is it to quote less taking into account the possible deflation of the Rupee when seeking and signing contracts with overseas partners? With so many B-school pass-outs running the show in some of the corporate, can they not do this simple projection for the next 12 months? Also, is it difficult to re-negotiate contracts to remain competitive and yet not have to resort to lobbying the government to inflate the currency?

"Over the last 18 months, RBI has put us on a detoxification course by limiting interventions. Let's not restart the bad habit."
It is not a bad habit of the RBI. IT is the lobbying by major goods and services exporters who want to fatten their own pockets, little realising that having more bills in the pocket does not mean earning commensurately more money if the value of the Rupee falls. If the readers notice a trend, at least I do, whenever there are economic difficulties, the imbecility of the management of major companies come out in the open; but these pathetically incapable corporate honchos usually have enough cash stashed up that even after inflation, they can life off their savings for quite a while, before they move onto destroying yet another company, and along with that, the economy. This applies to India, but not India alone.

 

[Bangalorean]

Rupee hits all-time low at 53.30 to US dollar

Crucial reforms not coming through. Political opportunism at its peak. Economy is suffering.
Industrial production has fallen by 5%. Negative growth for the first time since 2009. Drop in rupee has not helped exports either.

I hate Anna, I hate the political opportunists. It's better to grow at 10% under corruption than decline under transparency.

Now that was a politically incorrect statement.

I share your hate for the political opportunists. But spare Anna. Though he has made some shocking statements about economics in the recent past, his anti-corruption movement has the best of intentions and integrity behind it.

 

[Singh]

Rupee At Record Low Of 53.21 As Investors Flee To $ Haven
​

The rupee sank to a record low of 53.21 per dollar on Tuesday on worries Europe's debt crisis could exacerbate the growth slowdown in Asia's third-largest economy.

At 9:05 a.m., the partially convertible rupee was at 53.15/18, after falling 1.53 percent on Monday to 52.84/85.

Continued demand for
the American currency from banks and importers, coupled with news of negative growth in industrial output in October led to this sharp fall.

Dollar gains against other currencies overseas amid eurozone debt concerns also put pressure on the Indian rupee. The domestic currency had tumbled by 81 paise to close at a record low of Rs 52.84/85 per dollar in the previous session on strong demand for the American currency and strengthening
of the dollar against its rivals overseas.

During trade on Monday it had hit 52.87 after the industrial output index for October plunged 5.1 percent from the same month a year earlier, far worse than expected.

Dollar remained a safe haven amid a spate of bad news, Brijen Puri of JP Morgan told CNBC TV 18 in an interview.

The rupee is the worst performing currency against the dollar among major Asian peers this year. Investors continue to remain bearish on the rupee, a Reuters poll last week showed.

Rupee at record low of 53.21 as investors flee to $ haven | Firstpost

 

[pmaitra]

Now that was a politically incorrect statement.

I share your hate for the political opportunists. But spare Anna. Though he has made some shocking statements about economics in the recent past, his anti-corruption movement has the best of intentions and integrity behind it.

Anna is no economist, and even if he were to be considered one, he probably makes a very poor economist. However, I am sure he will not be as pathetic as those TCS, Infy, Satyam etc., bigwigs who go around pressurising the RBI to inflate the currency so that they can continue to remain competitive worldwide, give 'raises' to their employees and fatten their pockets and creating a make-believe world of 'growth.'

 

[Singh]

Rs 2,150,000,000,000: That's Our Gold Import Bill This Year
​

Indians are piling into gold like never before.

The latest import-export data released on Friday shows that India imported $41.4 billion worth of gold and silver in the April-November period of this financial year. That's over Rs 2,15,000 crore at current exchange rates. The imports are a record 56 percent higher than the corresponding period of last year.

What's going on?

Are Indians buying more jewellery? No. According to the World Gold Council, overall demand for jewellery fell marginally from 472 to 464 tonnes in the first nine months of calendar 2011, but investment demand went up by a quarter to 296 tonnes.


If gold imports are curbed, there could be an increase in smuggling – but this may be economically better than to let the rupee slide indefinitely. Reuters

Indians, traditional gold lovers, are finding the metal unaffordable to make jewellery, but are still buying it as a form of investment – because the value of everything else is being destroyed by double-digit inflation.

In fact, the doughty Indian is stocking up on gold for the same reason the Reserve Bank of India (RBI) did in November 2009, when it bought 200 tonnes from the IMF – to preserve the value of wealth. With the future of the euro and the dollar uncertain, it made sense for the RBI to diversify. In its forex kitty, the best returns have come from gold.

Ditto for the aam Indian. Over the last one year, gold has yielded a return of nearly 25 percent.

The macro picture is interesting. Next to petroleum products, which accounted for $94.1 billion of imports in April-November, India's biggest import is gold.

These massive imports are tipping the external trade balance heavily against us, and Commerce Secretary Rahul Khullar says that the overall trade deficit will be in the range of $155-160 billion in 2011-12.

In the remaining four months of the year, we will surely see further gold imports – say another $10-20 billion worth. It means nearly a third of our trade gap–thanks to our gold-lust.

Since the rupee's value is influenced by the current account deficit – the gap between out total foreign exchange earnings and remittances before accounting for capital flows – gold is an important tipping factor in the value of the rupee.

The paradox is that as the rupee depreciates, inflation worsens since imported goods cost more in rupee terms. And when inflation worsens, it makes more sense to hold gold to retain the value of your wealth. But as more gold is imported, it skews out trade gap, contributing to the rupee's weakness.

The upshot: what is smart investment for the average Indian is making things worse for the country. If the government wants to cut down its current account deficit and ease the pressure on the rupee, it should try and curb gold imports in the short term.

Of course, this will have some negative implications, too. If gold imports are curbed, there could be an increase in smuggling – but this may be economically better than to let the rupee slide indefinitely.

When gold soaks up a part of the domestic money supply, it reduces overall demand and curbs inflation.

No gold-loving Indian is going to love me for saying this, but it's time to restrain gold imports till the rupee and the current account balance stabilise.

Rs 2,150,000,000,000: that’s our gold import bill this year | Firstpost

 

[Bangalorean]

Anna is no economist, and even if he were to be considered one, he probably makes a very poor economist. However, I am sure he will not be as pathetic as those TCS, Infy, Satyam etc., bigwigs who go around pressurising the RBI to inflate the currency so that they can continue to give raises and fatten their pockets and creating a make-believe world of 'growth.'

I guess you meant, "devalue the currency". Agree with you - the IT majors will need to start focusing on efficiency and innovation now. Even though I am in the IT industry and the whole thing benefits me indirectly, I have had enough of this whole concept of inflating profits based on currency manipulation. It is in the greater good of the nation if the currency remains stable, at around 48 - 49.

 

[pmaitra]

I guess you meant, "devalue the currency". Agree with you - the IT majors will need to start focusing on efficiency and innovation now. Even though I am in the IT industry and the whole thing benefits me indirectly, I have had enough of this whole concept of inflating profits based on currency manipulation. It is in the greater good of the nation if the currency remains stable, at around 48 - 49.

Yes, "devalue the currency" = "inflation."

I have had enough of this whole concept of inflating profits based on currency manipulation.

Thank you and much appreciated!

the whole thing benefits me indirectly

How? You may earn more 'Rupees' in 2011 than you earned in 2010; but when there is inflation, the value of the Rupee goes down. You could have 1 kg of chicken for Rs. 40 last year, but this year, you are probably paying Rs. 50 for 1 kg of chicken. This hardly is a benefit. You just bring in more 'Rupees' and spend more 'Rupees.'

 

[pmaitra]

Now I was looking at this other thread. I think RBI should start stacking up as much gold as possible: http://defenceforumindia.com/economic-development/28657-india-imports-gold-worth-2-15-trillion.html

 

[Bangalorean]

How? You may earn more 'Rupees' in 2011 than you earned in 2010; but when there is inflation, the value of the Rupee goes down. You could have 1 kg of chicken for Rs. 40 last year, but this year, you are probably paying Rs. 50 for 1 kg of chicken. This hardly is a benefit. You just bring in more 'Rupees' and spend more 'Rupees.'

Well, what I have observed is, even with inflation, people in the IT sector are able to have a net increase in their spending power. Inflation badly hits those at the bottom of the pyramid, such as daily wagers, maids, auto drivers, and so on.

Taking job hops, salary hikes, etc. into consideration, the average IT chap in Bangalore gets a 8% increase in salary, year on year. Also take into consideration his increased loan and finance eligibility based on that increased salary!! The IT guy is at a huge advantage here.

 

[pmaitra]

Well, what I have observed is, even with inflation, people in the IT sector are able to have a net increase in their spending power. Inflation badly hits those at the bottom of the pyramid, such as daily wagers, maids, auto drivers, and so on.

Taking job hops, salary hikes, etc. into consideration, the average IT chap in Bangalore gets a 8% increase in salary, year on year. Also take into his consideration increased loan and finance eligibility based on that increased salary!! The IT guy is at a huge advantage here.

Yes, that's right, especially if you have a home loan or car loan; and it applies to anyone who has such loans, but IT job-hoppers definitely have an advantage, but overall, an 8% salary hike does not mean you are bringing in enough rupees that you could buy 8% more gold with your salary, if you go by the Gold Standard convention i.e..

 

[Yusuf]

Anna may have all the good intentions BUT, corruption was kind of "way of life" here. I really wish the 2G scam was not unearthed. I wish all other corruption scandals had not been uncovered. It has driven away everyone. No FDI coming in. The govt tried to get FDI which was made scapegoat at the alter of political opportunism.

2Now the government is busy justifying/clearing track etc of all the corruption scandals. Exposing corruption scandals has never been good for India. We have not bought a single howitzer since Bofors.

Like i said, corruption that gives 10-12% growth is better than transparency that leads to what we are facing right now.

The downward spiral is going to be bad for India over all.

Due to currency going down, import of defense equipment will get more expensive. And if the economy continues to slide then the money available will squeeze which means the government will have to think twice about allocating more money for defense which means crucial new systems will be put on hold for a long time.

Time to pull the socks. Unfortunately, even if the NDA comes to power, they will not be able to do anything either. Congress will do to them what the NDA did to them. So in the political bickering and one upmanship and opportunism will mean we may end up losing this whole decade which could otherwise have been the foundation for India propelling itself to superpowerdom.

 

[Bangalorean]

^^ I think there will be some pain, but it will result in creation of more sturdy and reliable systems and processes. Corruption very badly effects those at the bottom of the pyramid. And if our growth is detrimental to those at the bottom of the pyramid, we can never pull our nation up.

Let us reserve our abuse for those indulging in political opportunism and scuttling reforms.

 

[Yusuf]

^^ I think there will be some pain, but it will result in creation of more sturdy and reliable systems and processes. Corruption very badly effects those at the bottom of the pyramid. And if our growth is detrimental to those at the bottom of the pyramid, we can never pull our nation up.

Let us reserve our abuse for those indulging in political opportunism and scuttling reforms.

Please understand that there are some things that are "Indian". This is how the system is. This system has worked well for the last 20 years. Everyone prospered including lawmakers (law breakers). Common man has made his way up as well. I am far better off than what i was 20 years ago.

The coming of the Lokpal will spell disaster for India as every decision will be under scanner and because of which no decision will be taken at all. Pass the buck, let me be clean syndrome. Something that we accuse Anthony of who tries to protect his Mr Clean image and therefore does not take any decision at all.