[Samurai]

Originally Posted by lurker

And isn't this a 180 degree turn from what you mentioned earlier ?? Now you are saying that exports WILL NOT COLLAPSE if rupee is stronger, what matters is purchasing power.

No, I didn't turn at all, I only mentioned how stronger currencies can manage high exports. That is not the same as talking about a currency becoming stronger. The domestic prices don't fall or rise in sync with exchanges.

Originally Posted by lurker

If these costs can be kept low then price of rupee vs dollar will not matter but on the other hand will reign in inflation as well.

That is a very big IF. If I tell my employees that their salaries will be reduced because of dollar falling against rupee, they will leave me in a hurry. Same goes to all my suppliers and vendors. If they don't change their prices inversely proportional to strengthing of rupees, and my foreign clients want to pay same amount of dollars, then guess who takes the hit? If I raise my prices to compensate, the clients will move on to a cheaper vendor.

Originally Posted by lurker

What do you think is a better solution. Devalue rupee or manipulate price of inputs like China ??

We need to develop a very strong domestic market, then we will be more immune to exchange rates. But I don't see that happening in IT at least. I can't pay prevailing salaries for software engnieers and sell in extremely price sensitive Indian market.

[Wimwian]

Originally Posted by typeOnegative

Where's Seb Morris when you want him? I have not seen any move, covert or overt from the RBI wrt forex in the recent past - maybe I am wrong. Most moves have been on domestic monetary policy. And the rupee has been appreciating much before the RBI intervened.

Nopes, RBI was intervening in the forex market till Feb-March... one case in point, for eg. The Hindu Business Line : RBI intervention impacts rupee

PS: Dont remind me of Seb Morris... brings back painful memories of his dialogues with what?!? and the fact that nothing was going into my head

Originally Posted by lurker

What do you think is a better solution. Devalue rupee or manipulate price of inputs like China ??

Neither. As in any economic conundrum, there is no 100% correct answer to this question... all the government can do is to try and maintain the fine balance between rupee appreciation and inflation.

Please remember that we have a negative balance of trade (imports>exports) and the first impact of rupee appreciation will be to further widen this gap. When rupee appreciates to a larger extent than say the Yuan, our exports become costlier than Chinese goods... even though our import bill goes down, the fall in exports far outstrips any gain on that account.

An opposite view (i.e. in favor of rupee appreciation) is something that I mentioned in my previous post i.e. preventing rupee appreciation through intervention in the forex market by RBI leads to inflation. Another problem is the obsession of the Indian government with hoardinging forex reserves. Granted we almost defaulted on commited payments in '91 and holding a certain amount of forex reserves is required to meet emergencies like an oil shock or a war. But accumulating forex reserves means that we're sitting on idle cash while at the same time, we're paying interest on foreign debt... at last count India's forex reserve was close to USD 200 bio, so its easy to calculate how much money we're losing just on interest.

So utimately, its a question of who blinks first... if we let the rupee appreciate while China keep the Yuan in check, our exporters who have finally become competitive in the international market after years of painful restructuring will lose their edge. If we don't, we're looking at the monster of inflation rearing its head again...

[kvish]

I think this time RBI wants rupee to appreciate a bit, but at 38-39 levels I think they will intervene. Ultimately, rupee has to reflect the nature of economy. We have to allow it to appreciate if we are having a strong economic scenario. Once exports are hit, economy will show signs of slowing down and again the rupee depreciates, and it repeats. It is an unavoidable cycle unless we do some shady stuff like China

I am just trying to guess the scenario in the next 15-20 years.. I think rupee will further strengthen (which means it is good for this generation, bad for the next!!)

[GTO]

Originally Posted by steeroid

Man here we are lamenting how few rupees we get these days and somebody has gone a posted a thread asking why does it fall!

Took the words right out of mouth. Tell it to them!

[RX135]

I am no Forex/Finance/Costing/Accounting person, so take whatever I say with big pinch of salt.

We are focusing a lot on costs, i.e. lesser rupees per dollar, for our exports. I feel, we need to slowly move out of cost regime and get into value regime. "What value can I provide?" should be the point of discussion than "At what cost will I provide?" It will still affect the exports, but not to the extent that you will get out of business.

Sooner or later, with economy getting stronger day by day, Rupee is bound to appreciate. So, it's better to accept and plan for it, than do wishful thinking of having weak rupee all the time.

[Samurai]

Originally Posted by RX135

Sooner or later, with economy getting stronger day by day, Rupee is bound to appreciate. So, it's better to accept and plan for it, than do wishful thinking of having weak rupee all the time.

Some how I am getting a feeling that many people consider weak rupee vs dollar (1:40) is a bad thing. Please get over that feeling. By that logic, Japanese (1:163) or Italians (1:1424) should kill themselves in shame.

The rupee:dollar ratio of 1:40 is just a number. That is no indication of weakness or strength. It is normally used in relative terms, the fall or rise against dollar is referred to as currency getting weaker or stronger. Whether it is good or bad entirely depends on the balance of trade. Countries with trade surplus (more export than import, which is a good thing) hate their currency getting stronger against major currencies. That pushes them to the wrong side of demand curve. That is the case with India.

Countries with trade deficit (more import than export, which is a bad thing) hate their currency getting weaker against other major currencies. That reduces their buying power. That is the case with USA.

Originally Posted by RX135

We are focusing a lot on costs, i.e. lesser rupees per dollar, for our exports. I feel, we need to slowly move out of cost regime and get into value regime. "What value can I provide?" should be the point of discussion than "At what cost will I provide?" It will still affect the exports, but not to the extent that you will get out of business.

Sorry RX135, this is nothing but feel good speech. I have gone through this conundrum too many times. Unless you are a monopoly or happen to provide a value that nobody else can provide, you have to consider costs. Your price depends on your costs. No point providing a great value while making loss.

Only way to achieve partial immunity to forex variation is to serve the domestic market. But if your clients are affected by forex variation, you still get hit.

[sbasak]

By that logic, Japanese (1:163) or Italians (1:1424) should kill themselves in shame

but Yen & Lira are equivalent of Paisa not Rupee

Actually in future we do need to give value for money to the world rather than just cheap goods/labor only.

It still amazes me how West European countries & Japan have such strong economies in spite of small size and resource!

[Samurai]

Originally Posted by sbasak

but Yen & Lira are equivalent of Paisa not Rupee

In that case what is the real currency of Japan and Italy?

[v1p3r]

I was going to ask that too! Though these days Italy uses the Euro, just like most of the EU.

[Samurai]

Sigh! Don't worry about the absolute values guys. It is the purchasing power and variations against major currency that matters.

[lurker]

Originally Posted by Samurai

The rupee:dollar ratio of 1:40 is just a number.

No it's not. It directly reflects the purchasing power of the common citizen, who is currently at the wrong end of inflation due to the fact that certain entrepreneurs in the IT/VITY sector are encouraging govt to pump more rupees so that they can retain their profit-ratio.

This narrow mindedness passes off as the "need to have a weaker rupee". A few million in IT/VITY want to prosper at the cost of the millions of non IT/VITYians by fostering inflation and increased strength of the dollar.

Indian rupee should be valued at 38 in short term and around 17 in the median terms. IT/VITY will have to adjust accordingly.

Originally Posted by Samurai

The domestic prices don't fall or rise in sync with exchanges.

Yes they do, prices of fuel, and every other imported commodity will go up with falling rupee.

Originally Posted by Samurai

That is a very big IF. If I tell my employees that their salaries will be reduced because of dollar falling against rupee, they will leave me in a hurry. Same goes to all my suppliers and vendors. If they don't change their prices inversely proportional to strengthing of rupees, and my foreign clients want to pay same amount of dollars, then guess who takes the hit? If I raise my prices to compensate, the clients will move on to a cheaper vendor.

Your profitability will remain same, since purchasing power of rupee shall go up in medium term. Cost of goods shall come down. And there will be parity in what you pay your employees, in short the goods & services that they are able to buy with small amount of Rupee will also be same as before when Rupee was devalued.

As for exports of price-sensitive commodities, the entrepreuners who want to make profits will just scale-up and make similar profits. That is the choice of the trader how he wants to operate. A whole economy cannot be held ransom to the wishes of an exporter who wishes to keep his exports at low level and yet earn fabulous sums of money when converted into rupees.

That idea is an insult to the citizens of the country.

Originally Posted by Samurai

By that logic, Japanese (1:163) or Italians (1:1424) should kill themselves in shame

Yen is counted in denomination of 100 Yen to a dollar. But the Japanese economy cannot be compared to India's because we are far more vulnerable to inflationary pressure.

[lurker]

Originally Posted by typeOnegative

Theoretically yes and no. It all boils down to whether you can make a sustainable profit. For example you can sell to the US even if the current rates are reversed and still make a profit. But ask yourself how practical it is in the first place. China has had a low cost structure right from the start. It is tougher for us - will you like a pay cut for instance?

As pointed out by Samurai, by the time we realize that the exchange rates are hurting us, it might be too late.

Why yes and no. Either you say 'yes' or say 'no'. There are people who make
'sustainable profits' out of defrauding banks through taking loans that they have no intention of paying back. Do you think the responsiblity lies on the entire nation to keep these people afloat.

SHould the poor laborer pay more kerosene and food for keeping this gent afloat ?

You said China has a low-cost structure, what prevents India from adopting the same ?? Arable land in India and China is the same, infact it is more in India. Resources in both countries are same. World energy sources are closer to India than China who has to take circuitous route around Indian ocean to transport fuel.

India is also very much a managed economy. ONly problem is that it is managed by the Govt of India on behalf of some petty corporate interests and not the interests of wider nation at heart. The hearts of our ministers bleed for certain corporates like the one that starts with an 'R'.

Ordinary people far off from power think that there are certain very high-brow reasons why our economy is managed in such a way and why it has developed a high-cost structure. The fact is it is managed on behalf of and for a few influential corporates. No other bigger purpose exists.

[Samurai]

I am not familiar with your brand of Economics. So I give up.

But I have one question. What on earth is a VITY, who are VITYians? This is one case where even google failed me.

[lurker]

Originally Posted by Wimwian

Neither. As in any economic conundrum, there is no 100% correct answer to this question... all the government can do is to try and maintain the fine balance between rupee appreciation and inflation.

Please remember that we have a negative balance of trade (imports>exports) and the first impact of rupee appreciation will be to further widen this gap. When rupee appreciates to a larger extent than say the Yuan, our exports become costlier than Chinese goods... even though our import bill goes down, the fall in exports far outstrips any gain on that account.

An opposite view (i.e. in favor of rupee appreciation) is something that I mentioned in my previous post i.e. preventing rupee appreciation through intervention in the forex market by RBI leads to inflation. Another problem is the obsession of the Indian government with hoardinging forex reserves. Granted we almost defaulted on commited payments in '91 and holding a certain amount of forex reserves is required to meet emergencies like an oil shock or a war. But accumulating forex reserves means that we're sitting on idle cash while at the same time, we're paying interest on foreign debt... at last count India's forex reserve was close to USD 200 bio, so its easy to calculate how much money we're losing just on interest.

So utimately, its a question of who blinks first... if we let the rupee appreciate while China keep the Yuan in check, our exporters who have finally become competitive in the international market after years of painful restructuring will lose their edge. If we don't, we're looking at the monster of inflation rearing its head again...

Exports gaining by falling rupee is a canard that was first floated by World Bank and IMF and Manmohan Singh was the first nominee from IMF/World Bank who was elected as Indian Prime Minister. Falling rupee during the 93 debacle when Chandrasekhar/P. V. Narasimha Rao ruled India was basically due to the World bank and IMF ultimatum that it would help India only if we devalued our Rupee.

Do you think for a moment that these entities mean well for India ??

[lurker]

Originally Posted by Samurai

I am not familiar with your brand of Economics. So I give up.

But I have one question. What on earth is a VITY, who are VITYians? This is one case where even google failed me.

It's a Laloo-ism....he once said

'Yeh jo IT/VITY sector hain.....'

Also a lot of Kannada politicians pronounce IT/BT as ITTY/BITTY.