[Karan_n8]

Guys would someone be kind enough and point me towards an article/blog on how the currency valuation works? Very intrigued on why the INR is continuously depreciating and making it unaffordable to travel by the day.

[anandhsub]

There are mainly 2 factors that drive currencies.

1) Difference in inflation rates. Theoretically a currency that has higher inflation should weaken roughly by the difference in inflation rates. This relationship is broadly consistent over the long term. This is what is measured when some list currencies on a purchasing power parity basis.

2) The real rate of return ( expected return post inflation) on assets in that currency. Some use the Central Bank rate -inflation as a measure of real risk free rate and hence makes it easy to compare the real rates between 2 countries but isn't always right. Some also use the real gdp growth rate as a measure of real rate of return on assets in that currency but that isn't exactly right as well.

In the short term the country which has higher real rates will have higher inflows and hence could trigger a stronger currency, but this doesn't hold well always over the long term.

As such the weakening in INR vs say a basket of currencies over the last 10 yrs or so is lower than the difference in inflation rates. This is primarily because India has offered a higher real rate on return. For eg. Rates in Europe have been negative for a long time now.

You would have been much better off if you had say 100 EUR in 2010, converted into INR and invested in some liquid fund and now converted back to EUR than if you had just kept in some euro liquid fund although INR has weakened significantly vs the euro. Similar is with wages. An equivalent job in Europe has had much lower wage growth than in India even accounting for the depreciation of the INR.

[SmartCat]

Originally Posted by Karan_n8

Guys would someone be kind enough and point me towards an article/blog on how the currency valuation works? Very intrigued on why the INR is continuously depreciating and making it unaffordable to travel by the day.

In layman terms, INR depreciates against USD & other developed market currencies because of supply and demand. The supply of INR is too much when compared to its demand. But where does supply and demand for INR come from?

Demand for INR:

- If India becomes the hottest destination for FDI/FIIs, demand for INR goes up. Foreign companies and investors buy up Indian stocks, bonds, real estate and also set up new businesses here.
- Demand for INR also goes up when exporters convert their foreign exchange earnings into INR. Countries whose exports are more than imports generally have a strong currency.

Supply of INR:

- Money supply is managed by RBI. This wiki article will help you understand:
https://en.wikipedia.org/wiki/Money_creation
- Since India is unable to balance its budget (Govt expenditure is greater than taxation income), Government borrows money. It is like you taking a personal loan every year since your salary is not enough to take care of expenses. This constant borrowing of money increases supply of INR in the economy. Just like how when you take a loan, the absolute amount of money in your bank account goes up.

The above is a dumbed down explanation as to why INR keeps depreciating against USD over the long term. This will change only if:

- Imports fall & exports rise. Or rather, if exports is greater than imports
- If tax collections rise so that Govt does not need to borrow money to manage expenditure.
- India becomes a hot FDI/FII destination and foreign money flows consistently into the country.

[Samurai]

Who turned corporates into big bad wolves... it was Milton Friedman.

https://www.youtube.com/watch?v=DCbG9JGlze0

[mvadg]

Originally Posted by Samurai

Who turned corporates into big bad wolves... it was Milton Friedman.

https://www.Youtube.com/watch?v=DCbG9JGlze0

I recently watched some of Friedman's talks that are on YouTube. Pure drivel, he is able to intimidate everyone into submission and I suspect he was handed the Nobel in Economics just so the right wing businessmen could use him to further their agenda as Kurt Anderson describes.

[Samurai]

What is happening with MSNBC? They are going on and on over this topic...

https://www.youtube.com/watch?v=ffEyxcrJj58

[Jeroen]

Originally Posted by mvadg

I recently watched some of Friedman's talks that are on YouTube. Pure drivel, he is able to intimidate everyone into submission and I suspect he was handed the Nobel in Economics just so the right wing businessmen could use him to further their agenda as Kurt Anderson describes.

So what are we saying here? The Nobel prize committee is a hot bed of right wing extremist promoting extreme capitalism?

I always knew those Nobel prices were completely fake. A true conspiracy!

Jeroen

[Samurai]

Originally Posted by Jeroen

So what are we saying here? The Nobel prize committee is a hot bed of right wing extremist promoting extreme capitalism?

No, what I think is Nobel committee jumped the gun. For science candidates, they wait until the theory has been fully proven and accepted. But for economics and peace candidates, they don't appear to wait until the true contribution has been generally accepted.

When Milton Friedman evangelized monetarism, the Nobel committee should have waited for couple of generation to see the true impact of that policy which was implemented by Reagan and Thatcher.

Milton Friedman admitted he was wrong about the whole thing in 2003, he got his Nobel in 1976 before it was really tested in any country.

https://www.theguardian.com/business...economicpolicy

[Sree]

https://www.bloomberg.com/news/featu...r-businessweek


Don't know whether this is the correct thread to post.
Businesses will soon decide a greater role in geopolitics.

[Samurai]

Originally Posted by Sree

Businesses will soon decide a greater role in geopolitics.

What is new? Remember who annexed India? It was a business, known as East India Company. In fact, between 16th to 19th century, plenty of geopolitical changes were caused by MNCs.

[dragracer567]

An interesting article by the foreign policy magazine regarding the political uproar over India officially becoming poorer than Bangladesh in nominal GDP terms in 2020.

Here is the Link

The article basically says that the concerns are overblown, here is why:

1) While Bangladesh has a higher nominal GDP per capita in 2020, its a mere $11.25 difference which is so miniscule, its almost a rounding error! Even in that, Bangladesh didn't actually overtake as much as rather the Indian economy shrank and will almost surely go back to being higher in 2021 though its projected that by 2025, Bangladesh might actually catch up.

2) Indian rupee is a freely trading currency but the Bangladeshi Taka isn't and is widely believed to be overvalued (someone please explain to me what a freely trading currency means). So on a PPP basis, India is still richer ($6,284 vs $5,139)

3) Indian exports are still higher in terms of % of GDP at 19% (which is same as China) as compared to 15% for Bangladesh. This is a big deal because larger countries generally export less as a % of GDP due to their larger internal markets. Also, I personally was surprised given how much Bangladesh has been hyped up due to its textile exports.

4) Not to take anything from Bangladesh, they are consistently growing faster than India since 2017 while their social indicators vastly outperform India. So, that's one thing we can learn from our neighbor.

Also, this interesting video (linked below) describes how the Indian economic growth has been an exemption given that it directly skipped to highly-skilled manufacturing and services without going through the low-skilled manufacturing phase like Bangladesh, Vietnam and even China at one point. This is a problem and the reason why such a big percentage of our population are stuck in farming as highly-skilled manufacturing and services sectors requires less in number but more highly trained workers. Hence, that explains the absolutely massive divide between rural vs urban citizens and mind-boggling regional variations where the difference in GDP per capita between Bihar and Delhi is the same as the difference between Colombia and the United States!

https://www.youtube.com/watch?v=lZBGnU9oHXA

Originally Posted by Samurai

What is new? Remember who annexed India? It was a business, known as East India Company. In fact, between 16th to 19th century, plenty of geopolitical changes were caused by MNCs.

Well, Cyberpunk 2077 is fun video game, not so fun if that is our future!

[tsk1979]

Originally Posted by Samurai

What is new? Remember who annexed India? It was a business, known as East India Company. In fact, between 16th to 19th century, plenty of geopolitical changes were caused by MNCs.

Why go so far back. Look at Iran about 70 years ago.
MNCs asked for a coup and got one.

[vrprabhu]

Originally Posted by dragracer567

...
2) Indian rupee is a freely trading currency but the Bangladeshi Taka isn't and is widely believed to be overvalued (someone please explain to me what a freely trading currency means).

4) Not to take anything from Bangladesh, they are consistently growing faster than India since 2017 while their social indicators vastly outperform India. So, that's one thing we can learn from our neighbor....

Freely trading currency means that it can be converted into any other currency - at prevailing exchange rates. Indian Rupee can be exchanged in US Dollar, Sterling Pound, Euro, Riyal, Japanese Yen etc. on the rate quoted at the time of exchange. (If it is not freely tradeable, the monetary authority of that country may 'prescribe' a rate at which their currency will be exchanged for foreign currency)

In fact, for exports to foreign currency, invoices can be raised in INR (overseas buyer should be agreeable for this, of course!).

I am not too sure about the social indicators in Bangladesh, but what I am told is that they are developing their infrastructure much faster (copying the Chinese model?) - which will translate into faster growth down the years?

[SmartCat]

Any comments on this line of thinking?

- Fiscal prudence is bad for growth.
- Higher inflation is an acceptable price to pay for growth
- Debt to GDP ratio of up to 100% is fine (we have always been at 60 to 70% I think)



For those who do not know Shankar Sharma, he has been extremely critical of Govt's handling of economy since 2014.

[warrioraks]

Originally Posted by SmartCat

Any comments on this line of thinking?

I am not a student of economics but my 2 paise as the mango man:

- India cannot afford low growth-low inflation scenario considering millions are still living in poverty
- That does mean that the government will have to compromise somewhere to fuel growth (inflation, fiscal prudence, etc)
- Excess of anything is bad but it is hard to quantify what does ‘too-much’ mean when it comes to debt-gdp ratio and other similar parameters.
- One thing for sure, these supposedly bold measures from the budget are only one sided and will take our country towards instability if the other side is not fixed
- By that, what I mean is - announcements like creating bad banks, reinstating DFIs are done with an expectation that it fuel credit growth which will in turn lead to real-economy growth. The question is, will it really work in a scenario where we already have so much liquidity in the system and hardly anyone lining up to avail these loans?
- The issue that needs to be addressed is how can a congenial environment be created which encourages businesses to borrow money and invest for future. I seriously see that sentiment missing

In my layman terms, the government might or might not have hit 4 sixes during this budget. But the actual deciding factor of this match is on how do they bowl and stump out the wickets of corruption, policy hurdles, lack of confidence in the economy and difficulty of doing business.