[drmohitg]

Hi,

Over the last 2 months our INR has really taken a beating. From around 48-50 rs for a dollar it is now trading at 64.5 rs per dollar as on today. The pound is at around 100 rs for 1 pound and the Euro at Rs 85.
This has left me wondering as to what is exactly going on? Our economy is not doing great but its not doing this bad also that we are losing our currency's value at this pace. Can the Economists on the Forum throw some light on what according to them is the real reason behind this sudden downfall? And if it really is being stage managed by some people for reasons unknown?


Regards,
Mohit

Please don't make it a political discussion but rather lets stick to the economics of the whole thing.

http://profit.ndtv.com/news/market/a...-lateststories

http://profit.ndtv.com/news/forex/ar...eutsche-326087

[NPV]

The USD has surged almost Rs.10 in about 4 months time
I'm hearing folks talking about a Greece/US type crisis here as well but unable to understand what's really causing this ? Hope some of our Economist friends can throw enough light on the topic.

[null]

I guess it is due to two factors: internationally, US economy has started showing some signs of improvement which is making the US$ stronger against all other economies and at a national level, the imbalance in import vs. export (trade deficit) results in local currency losing its sheen against the world currency.

So, both put together is pulling the Rupee down & down & further down.

PS: I read an article yesterday (I think) which claims INR would fall to Rs70 levels against the dollar in the near term. I am unable to get that link now.

[drmohitg]

Originally Posted by null

PS: I read an article yesterday (I think) which claims INR would fall to Rs70 levels against the dollar in the near term. I am unable to get that link now.

I have posted the link for the same in my first post. What I am unable to understand is that whatever is causing this, is it so strong to just wipe off a whole rupee in a day vs the dollar. Earlier the changes in currency rates used to be a mere few paise here or there. Now its 60 one day and 64 a week later which makes me suspect a larger nexus behind this whole fiasco.

[SmartCat]

When the market is allowed to decide the value of a country's currency (like India), it automatically fixes all the ills of the economy.

Biggest problem with India's economy: India imports lots more goods than it exports. Till now, this was not a problem. Because India used to get Dollars in the form of FDI and FII investments in equities and debt. And that used to balance "India's chequebook"

But now, US economy is doing well, dollars are going back from India to developed economies. And that weakens the Indian Rupee.

Rupee weakening is not bad for the economy, inspite of what newspapers say. Yeah, it will increase inflation (because most commodities are priced in dollars). But all the exporters will gain because they will have pricing advantage over competitors from other countries.

Also, we will see less imports of non-essential items (especially all that junk we import from China). This will again help local manufacturers of such items.

All this will get the economy on track, but it will take time.

[R2D2]

2 years ago in August 2011 the INR was @ 45/$. It has depreciated by 42% in this time.

Shame on this Govt. They have presented us with an epic failure to manage the country's economy, giving higher priority to petty politicking and dole outs that we cannot afford the most recent being the food bill/programme that will cost tax payers a humongous 125,000 crores.

[Chetan_Rao]

Ours was one of the few economies that was growing robustly despite the global slowdown, but several years of doing nothing (policy paralysis, as every expert loves to call it) has left us in this situation.

We needed to capitalize on our strong situation w.r.t. world economy over the last 5-6 years, but we didn't. Now it's too late, and letting the market correct the anomaly is the only viable solution available right now.

[Supercool]

Another issue is low economical growth in india. Nobody wants to invest in market with low returns. Second notable point is our ever growing crude oil requierments for which we depend on imports. Most impotantly the policy and reforms agenda in india is moving like a turtle. Falling rupee is hitting us hard. I am sure fuel prices may be increased soon trigerring cost increase for most of the things.

[amitoj]

We were just now discussing this in office.
One main reason for this is that FII influx has almost dried up, thus magnifying the current account deficit. And the two main reasons for this are:
1. Rising US economy, due to which its not just INR, but other currencies too (Brazil, Australia, Russia to name a few) are taking a hit.
2. Policy Paralysis in India has taken its toll on FII confidence which has taken further beating by incidents like the Vodafone tax case.

Some are even predicting for rupee to hit 70.

[RoadTiger]

A disclaimer : my profession is connected with the financial markets.

A few facts
1. US Fed had Quantitative Easing (QE) which led to a flood of money that has fueled the rise in liquidity (money flow) across the globe
2. Some of the money came into India in the form of investments in debt market (because interest rates were expected to fall, leading to increase in bond prices, in addition to the higher rate of interest earned on Indian bonds) and equity (because Indian economy was supposed to do better than developed ones)
3. A lot of the money invested in debt markets has been pulled out now because it is apparent that RBI will not cut interest rates till inflation comes down and inflation is not coming down due to a constant surge in food prices, fuel prices & energy prices.
4. Structurally, Indian imports have surged due to
a) Oil consumption growth (Govt has done very little to boost local production)
b) Coal imports by power plants (thanks to lower production due to Coal-gate scam)
c) Significant gold imports (since gold is the only asset class that has delivered more than 100% returns over the last 4-5 years and equities, real estate are down + Indian's fetish with gold jewellery and gold investment)

There is very little foreign investment due to various issues incl. Govt's flip-flop on policies, cross-border taxation among other reasons

Fundamentally, this has led to widening of the trade deficit (export-import)

The recent run on the currency is significantly driven by speculative forces because of multiple factors like USD strengthening globally due to better US economic data, fears about foreigners pulling out equity investments in India and lack of confidence in Govt's ability to reduce the trade deficit. In this period, exporters are betting that rupee will go down further and hence holding onto their dollars to sell later while importers are scrabling to buy dollars before it becomes more expensive. At some stage, exporters will start selling, foreign remittances will start pouring in that may ease the pressure on the rupee in the short-term ... my sense is at 64.5, we may be there already in the short-term and the rupee could certainly pull back to 60-62 or so if there are any positive triggers.

However, unless some of India's fundamental problems are addressed, rupee depreciation may continue over time.

The implications of a weaker rupee will be largely unfavourable due to higher cost of oil imports - Hikes in fuel prices - further adding to inflation all around and reducing RBI's ability to cut interest rates - further denting growth rate. However, it may lead to export competitiveness and higher exports, increased remittances and in case the view changes to Indian economy doing better, foreign investors will come back expecting capital gains + the benefit due to currency appreciation

[Gandhi]

There are multiple factors contributing to this as pointed already. But the major one has to be the FII influx that has fallen like anything in past 2-3 years. Foreign investors have lost confidence in Indian market, not because of lack of potential but because of draconian laws that make setting up business in India a nightmare. The Govt has tried to stem this situation by coming up with hasty policies without any clarity and thought which has made the situation even worse.

Here's are a couple of articles on frustrations that foreign investors feel -
http://online.wsj.com/article/SB1000...684912770.html
http://articles.economictimes.indiat...shire-hathaway

Quote -

In September 2012, Manmohan Singh's government passed a law allowing big retailers to open stores directly, yet no one has. Reasons are legion: too many prerequisites; constraints on whom goods can be purchased from; a raft of regulations limiting franchise models and factory construction; and the hairpulling need to negotiate separately with each of the states.

[ajmat]

Here is an interesting article
http://www.independent.co.uk/news/bu...s-8779120.html

[selfdrive]

In my not so expert opinion, too little is being done too late. Fuel subsidies should have been removed long ago, perhaps this would have helped a little.

A few days ago, there was some news about duty being levied on TV sets being brought into India. Fine, but is it not like bringing a spoon to remove flood waters?

All that we hear is that RBI sells dollars to save the sinking rupee. But is someone doing something to help the rupee in the long term? Perhaps some experts can clarify this? If not, it seems that the new level would become 70 to 75. We dont get that kind of salary hikes anymore, so do we have to look for a new job every other year just to keep up with inflation?!

At a personal level, I am being made to look like a fool for returning to India. If I stayed back, I would have had a 30% hike in rupee terms in the last 4 months! As a layman, what I see is that the rupee falls by 60 to 80 paise a day, and if it gains it gains by 10 paise maximum.

[Gandhi]

Here's another well researched analysis of the situation. Thought it mainly focuses on political motives, it's worth reading.

http://www.firstpost.com/economy/son...s-1040365.html

[tsk1979]

I am no economist, and I seriously do not understand what they say about macro economics, mini-economics, mini skirts or pants or hot pants.
Its all mumbo Jumbo.

I see it all as a layman.
As a layman, lets say I put aside 50 lakhs for renovating my house(That would make me a very rich Layman).
I decide I will stay somewhere else for 6 months of renovation paying rent.

After 3 years of renovation, and spending 200 lakhs my house is still not renovated.
What happens.

The money I could have used for myself, has vanished. What will it do to my budget and my economy?

I feel this is the same with India.

Exhibit A - National highway 1.
I would call it Fraud highway 1

A few thousand crores budget, and 6 laning within 2 years.
Now budget has overshot, the highway is in a worse position, with only 1 lane.

Money has been spend, there is no highway, and every vehicle on that highway is spending more fuel which is imported.

Any economy which spends money like this without results is doomed to crash and burn.

Exhibit B: Real estate and black
Try buying a flat lately? 1 Crore is peanuts. seriously. In a big city 1 crore will buy you a simple flat from a reputed dealer, with no bargain.
But have you driven around? There are thousands of flats complete and tens of thousands completing in "next 3 years from past 10 years". The complete flats are empty. Nobody lives there.
Where is the money, where did it go, where did it come from? What sort of system can keep building flats and keep prices high defeating the basic premise of supply and demand. A system with a lot of money to sit on. where is this money. Its the dark matter money. Our economy is the dark matter black money economy. Here hundreds of crores are stuffed in mattress out of circulation.

Exhibit C: Middleman
Bought onions recently. 70rs a kg. I should rejoice(being from a farmer background with agri land cultivating onions). But nobody gives me more than 11rs. All I get is 11rs
Where did the 59rs go. I sold a lot of onions. The crop was not so bad, but still it was not so good, just average. Maybe somewhere rain destroyed some crop. Not here though.
So there was ample supply. 25rs a kg for 11rs at the yard is understandable. But 70rs?
Its the hoarders and middlemen which run this economy. Its like the pimps you see on crime drama shows. They take the cut.

Exhibit D : The elephant in the room
I once saw an elephant video where it went wild and mowd down people. right now Foreign investors view India like that. Govt is low on revenue? What to do? Change law and then start taxing "in the past". Who does that?


I am sure there are many more such exhibits.

Think of India has a house where the roof is leaking, rats infest the kitchen, the bathroom is full of roaches, and beds have bedbugs. And then wonder why nobody rents it.