Currency exchange rate depends on the following, 1. Investment flow - FDI and speculative - Capital account 2. Current account - exports and imports. The reason why India is getting lot of foreign investment both FDI and speculative is because MNCs are expecting a good return for all the USD they invest in India. When will this happen? When the consumers both retail and corporate have good disposable incomes and purchasing power. Does this require Indian rupee to be weak because most of the jobs created in the last 5 years were due to outsourcing which led to a huge Indian middle class with lot of disposable income. This leads us to believe that Indian rupee has to be weak but due to capital inflows Indian rupee is becoming stronger in the short term. This may lead to lower revenues for exporters in IT, ITES but costs are also lowered as price of oil,imported manufactured goods etc will be cheaper. Will this lead to the death of Indian mfg, if the immediate impact is only to revenue and not cost.Yes. 2. We also need to analyze what percentage of India's GDP is exports. If we don't export value added products, our exports will be directly impacted by currency fluctuation.We end up earning less for the precious resources we export if the Rupee appreciates.If the way India is going to earn money is going to be through labor, example IT and diamond cutting, it is in India's interest to prevent the rupee from appreciating. One way to do it is to artificially peg the curren
All these repeated articles about the dangers of rising rupee on REDIFF really smells fishy. Does it have a conflict of interest? I wonder if it gets most of its revenue in $$ OR Re. If it is getting $$ from the expatriate community, it would make a lot of sense for them to hype this issue.
RE:REDIFF has a conflict of interest!!
by Natarajan Vijay on Jul 26, 2007 08:03 PM Permalink
Guys, I am right. REDF indeed has a conflict of interest. Their shares trade on NASDAQ with Ticker REDF. They have reported results today. THey have net income of $2.31 million. However, their income is down $440,000 due to exchange rate effects. Their stock is down nearly 16% today on this news. So REDF is promoting the idea of debasing our currency using tax money collected from all indians to make their bottomline look good!!!
RE:REDIFF has a conflict of interest!!
by kumar on Jul 26, 2007 08:30 PM Permalink
how do they use tax money collected from all indians to do that. i am so confused how this happens.
RE:RE:REDIFF has a conflict of interest!!
by Natarajan Vijay on Jul 26, 2007 09:16 PM Permalink
Kumar, this is how it happens. Lets take a closer look. For e.g., let us assume that if the RBI were to let the rupee float, then the exchange rate would be Re30=1$ (I dont know what it will be exactly, only that it will lower than the 40Re now). What the RBI is currently doing is paying greater than the market rate i.e. it paying Re40 instead of Re30 to those who sell their dollar. It is this a Re10 discount to dollar sellers. It is in effect a Re10 discount to buyers of Indian software services in the US and Infosys/Wipro get the benefit of this discount int he form of greater profits. But where does that Re10 come from? The govt. either pays it out from tax money or just prints this money. If it pays it out in tax money, this money comes from all Indians, whether they are involved in exports or not. For e.g. doctors dont export their services but they pay taxes so do bus drivers, retails business owners etc etc. The govt. thus taxes all Indians for the benefit of those in the export sector. (The conclusion is the same if the govt. prints the money, the tax is in the form of inflation). This is really stupid. Why should the govt. rob the poor bus driver and pay it to the rich Narayana moorthy and the rich software engineers!! Let the market do its job!
RE:REDIFF has a conflict of interest!!
by Tarak Chatterjee on Jul 26, 2007 09:31 PM Permalink
We may be missing out on one thing - India does huge amount of imports too. One important thing for a stronger economy is to have (export minus import ) = a positive value. If exports value fall the value will not remain positive for long - resulting in huge trade deficits, as one has to buy (import) using $ or Euro.
RE:RE:REDIFF has a conflict of interest!!
by Natarajan Vijay on Jul 26, 2007 09:42 PM Permalink
Why would we want to export more than import? When you go grocery shopping, do you pay Re10 to Re5 value of goods? Imports is what we consume, exports is what we pay for what we consume. When imports are greater than exports, it means that foreigners are using Rupees to buy Indian stocks and bonds instead of Indian goods i.e. they are investing here, which is good. Investment creates jobs and causes the economy to grow.
RE:REDIFF has a conflict of interest!!
by Manas Panda on Jul 26, 2007 09:28 PM Permalink
this is really a very stupid comment. I think U have a conflict of interest... do u sell rupees to get dollars? Moreover you DO NOT understand ECONOMICS at all..otherwise U would not have made a blatant comment like this full of ignorance. Go read the basics of economics ...I do not need to explain why the article is meaningful ...
RE:REDIFF has a conflict of interest!!
by Manas Panda on Jul 26, 2007 09:51 PM Permalink
Just to add All those people who are saying a 30inr/$ will increase you purchasing power ..here are some things that will actually happen.. 1- 1/2 of the people will lose jobs and People will stop getting hikes [the purchasing power of people will infact go down and heads will roll] 2- Indian and Chinese economy is still a fraction of US mammoth and dependent so much on US money (Check WB/IMF) Figures. 3-Check why the Chinese Govt is controlling their currecy (BTW US wants both Yuan and INR to appreciate a lot such that JOBS and competitiveness will move back to America and Asia will move back to its age old begging days. US is in fierce fight with the Chinese on this issue) 4-Economics will takes its way but a sudden INR appreciation [Not giving time for businesses to adjust/react/productivity increase] will see many other lethal harms which you will see sooner or later.
RE:REDIFF has a conflict of interest!!
by Natarajan Vijay on Jul 27, 2007 12:02 AM Permalink
Manas, "1- 1/2 of the people will lose jobs and People will stop getting hikes [the purchasing power of people will infact go down and heads will roll] ". There will be labor reallocation to different sectors of the economy based on India's strengths. But there will not be a net decline in unemployment. For e.g. when India opened up 1991, this began a major reallocation of labor from agriculture to other sectors fo the economy such as manufacturing and services. This was indeed tough for the people involved but it was for the overall good. There is economic theory and no practical data to prove that exchange rates affect overall unemployment. "2- Indian and Chinese economy is still a fraction of US mammoth and dependent so much on US money (Check WB/IMF) Figures." What WM/IMF figures? Dollar bills are green pieces of paper. We cannot eat dollar bills or live in them. What matters is India's productivity, which will improve when the Govt. keeps its hand off the market! "Check why the Chinese Govt is controlling their currecy (BTW US wants both Yuan and INR to appreciate a lot such that JOBS and competitiveness will move back to America and Asia will move back to its age old begging days. US is in fierce fight with the Chinese on this issue)" If currency manipulation is so important, why does the US not manipulate its currency. Again, what matters is how productive we are. We cannot grow the country by manipulating the currency!
RE:REDIFF has a conflict of interest!!
by Hans Solo on Jul 27, 2007 04:20 PM Permalink
Natarajan, u r fed with this stupid logic that a "Stronger Rupee means Stronger Indian Economy" There are many countries whose currency is stronger than USD but doing no good and there are countries (like Japan) who had strong economy but their currency is wat 1USD = 900yen?
RE:REDIFF has a conflict of interest!!
by Natarajan Vijay on Jul 27, 2007 10:04 PM Permalink
Mr. Solo, You are confusing nominal and real exchange rates. Japan has a strong currency BTW.
I dont know how many of you remember exchange rate history before 1991. At that time, RBI was involved in appreciating the Rupee to keep India's dollar denominated debt load managable. There was constant talk about India defaulting on its loans. Today it is just the opposite, the RBI is undervaluing the rupee. We have to ask why? When the country is stagnant, our currency depreciates and when we grow our currency appreciates. This is becasue, when we grow, foreigners want to invest here, which increases the demand for rupees cause it to appreciate. It is the opposite when we are stagnant. But what exactly does the appreciating rupee mean. It means that the purchasing power of Indians is increasing. When India is growing, the productivity of the average Indian is growing. This means that an average Indian's work gives him more purchasing power in the global marketplace. This is what is reflected in the appreciating rupee! American computers, Boeing jets, crude oil etc. etc. are all cheaper. Our purchasing power is increasing, Indians are rewarded. But this will happen only when the rupee appreciates. When the RBI intervenes and undervalues the rupee, it is undervaluing the average Indian's global purchasing power. Whose side is the RBI on? Have they done a study of all the benefits that we acrue due to the strong rupee? This is just politics!!
RE:Rising Rupee is Pay Raise
by Gunjeet Sra on Jul 26, 2007 09:05 PM Permalink
I strongly disagree with your point of veiw. Today India is benefiting due to the Fundamental universal principal of "flight to quality". Service sector & exports over the last couple of years has given the indians the purchasing power they hold today. IT,ITES,services didnt grow untill $ came in and people in the west thought its the place to get high returns. You try leaveing India on its own without effecient investments and you can see all grwoth stories plung face down in near future.You can surely buy more of boeing with indian rs today but how long will that last, have you ever thought? I dont want to ridicule the efforts in Indians but maintaining these equations is more economicaly essential then political. Country like China also thinks about Dollar equation inspite of being a communist society & you wonder "whose side RBI is on?"
RE:RE:Rising Rupee is Pay Raise
by Natarajan Vijay on Jul 26, 2007 09:37 PM Permalink
The US does not manipulate its currency. Do you want to be like the US or China?
RE:Rising Rupee is Pay Raise
by Hans Solo on Jul 27, 2007 04:24 PM Permalink
India would be better off competiting its neighbour (who had much economic/regional similarities) than equating with US.
How u know US does not manipulate its currency? Then can you please show the M3 supply of dollar? Why this data not in public domain.
Seems like u have some vested interest in exchange rates? Have u bet ur fortunes on Rupee?
The Fed in the US is extremely transparent. Its primary purpose is to control inflation and its primary tool is the fed funds rate. It adjusts the money supply to adjust the fed funds rate. But what is money? Is it M1, M2 or M3? If you look at data from the 90s, monetary aggregates have been all over the place eventhough inflation has been stable. Hence the consensus is that, with all the financial innovation inthe US, monetary aggregates dont make much sense in the short run. The very fact that the fed is able to control inflation by controlling the interest rates is proof enough for me thhat they done manipulate exchange rates. While US politicians are stupid, the fed is controlled by top rate economists, who know that undervaluing you currency is wasting your wealth!!
RE:RE:Rising Rupee is Pay Raise
by Natarajan Vijay on Jul 27, 2007 11:23 PM Permalink
"Seems like u have some vested interest in exchange rates? Have u bet ur fortunes on Rupee?"
My friend, I am an Indian citizen currently working in the US. Hence, my personal net worth measured in INR is decreasing. However, there are about 1billion indians who have bet their fortunes on the Rupee. They have a vested interest in not being robbed by the RBI!
RE:Rising Rupee is Pay Raise
by chirag dixit on Jul 26, 2007 09:05 PM Permalink
Hi Folks, Well, I live in USA, work as a software engg. I agree with Mr. Natarajan, though at personal level my $ value have been hit due to rupees appriciation. But we must understand, that Indian common man will have more purchasing power in global market. More quality goods can be exported and consumed from other market for example here, in US i can buy a good luxary car @ cost of Maruti Esteem in india. So folks we all as NRI should also feel proud that INDIA is doing good. And it's not only INIDIA, its US policy which made their $ depriciated at all other economy, for instance study the Aus$ rate graph compare it against USD, you will understand. INR has still good scope of appriciation, and Govt should take benifit then crying for few exporters. Exportes had earned alot while INR was down, now they have to survive with better quality than cheap supplies.
RE:Rising Rupee is Pay Raise
by ashish sinha on Jul 26, 2007 08:46 PM Permalink
very true. if you grow your value is bound to grow. Strong rupee is a reward for good economy.
Our industries need to realize that with growing economy they need to evolve as well. If they keep on doing whatever they feel comfortable with, without any innovation or improvement, its sure that they shall be wiped out.
A growing economy needs smart industries. Growing Rupee has a lots of benefits to offer to them to help them innovate and grow vividly.
RE:RE:Rising Rupee is Pay Raise
by Amitabh Kumar on Jul 26, 2007 09:05 PM Permalink
Well, I guess we all know that currency appreciates with the growing economy. But don't you think RBI was sleeping for last 3-4 years cause the rupee never appreciated during this period. I guess currency appreciation should be gradual it's impact in international and domestic market can and will be adverse.
RE:RE:RE:RE:Rising Rupee is Pay Raise
by Natarajan Vijay on Jul 26, 2007 09:39 PM Permalink
Amitahb: The currency would have appreciated on its own a long time ago. But the RBI prevented it from appreciating. Now, unable to contain inflation due to the influx of capital, they have been forced to let the currency appreciate.
Rising rupee can be used to pay off foreign debts. We can buy currency from the market and reuce the foreign debt. we can close some small deals. also, we can have dollar kept with us for any emergency situation. It might be possible that dollar might be quite high at that time of emergency and same amount of currency may cost much dearer in Indian Rupees. Also, as stated by Petroleum Minister, there is no need for price rise of fuel. When the price was last raised, with $75 a barrel, rupee was at around 45 Rs/Dollar. Now it stands at 40 Rs/Dollar. Govt should think of this aspect.
RE:We can use this opportunity
by Srinivas Miriyala on Jul 26, 2007 04:30 PM Permalink
I do not agree with your views. Rising rupee effect is more than just paying oil bills. I think India should peg the currency value the way China does. That will boost our exports. As long as our exports are growing we will be able to pay for Oil bills. To tame the inflation govt. can pump in that extra money into giving subsidy on petrol, diesel etc. The difference is so huge they can give subsidy to farmers and on transportation that will bring down inflation.
After months of trying to correct the rupee devalution situation by appreciating the rupee (almost to 39 Rs to a USD), the RBI seemed to exercise damage limitation to the exporters' community by marginally depreciating it. Like a swinging pendullum, the rupee has slowly started the appreciating trend again since this week began. Being an exporter, basically the question I ask in trepidation is - "what's next?".... Will the appreciation continue or can I expect a downswing just around the corner???
3)The problem lies in quoting prices in US dollar (since rupee was on downslide against US dollar for the last 50 years, continuously). All Indian exporters wanted to make extra-ordinary profits from rupee downslide.
4) On Purchasing power parity basis, rupee is still under valued by 60% compared to US currency. That means, it is still cheaper to buy Indian goods for most of the world.
Bottomline: Exporters need to export more to Non- US market, OR quote prices in currency other than US $. Either would take care of US $ downslide risk, which has not ended yet.
RE:Lowering US dollar continued.. Part 2/2
by Ajay on Jul 26, 2007 09:34 PM Permalink
Qualift your statement by giving the example.
Housing (much inferior quality) is more expensive in India then US/Canada/Australia
Renting is cheaper in india.
Agricultrual land is more expensive in India than US/Canada/Australia
Helathcare is free in Australia/Canada/UK.
Following Fruits are more expensive in India - example Apple, oranges, grapes, almonds etc etc
vegetables are slightly cheaper in india.
Milk is Cheaper in india.
Grain - wheat, is cheaper in price.
Fuel is more expensive in India.
Telephones are slightly cheaper in India
Internet connection is more expensive in India
Kids education is expensive compared to public schools and cheaper compared to private schools. majority send kids to public schools anyways.
Comparative cars are expensive in India.
Liquor is expensive in India.
Branded clothing is same price. Non branded is cheaper in India.
Maids and servants are cheaper in India.
Computers are same in price.
Meat is slightly cheaper in india.
My personal experience cost of living in India is about 60% of cost of living in US/Canada/Australia if you are renting and 100% if you have financed a property.
US dollar has gone down against all major currencies because of US budget deficit and trade deficit. US had been covering the deficit through foreign capital investments. Presently, there is increasing strong confidence in Euro currency for CAPITAL INVESTMENTS (since George Bush is seen as a moron everywhere in the world, Capital investments in USA are a mute point in World Intelligent community). Rupee has not appreciated (on the other hand, Dollar has sunk) against Euro, pound, yen, australian and Canadian dollar. What does that mean:
1)That would prompt inflation and interest rates to go higher in USA. That means prices everywhere that are being quoted in US dollar would have to adjusted (ie. raised); very very soon.
2)Immediately, Prices can be negotiated for exports to everywhere except USA, without any problem. Exports to USA can be negotiated too, since USA importers know better how bad the currency crisis is (unless the goods are coming from China, wherein, industry such as Leather industry would definitely suffer since China's currency is pegged to US currency at 7.75 Yuan). Then again, China would have to pay for this STUNT since Chinese govt owns 400 Billions in US $ debt that means, Chinese Govt would be hurt very badly, very very soon. So don't worry, WHAT YOU SOW, THOU SHALL REAP, applies to China.
This response is in two parts. US dollar has gone down against all major currencies because of US budget deficit and trade deficit. US had been covering the deficit through foreign capital investments. Presently, there is increasing strong confidence in Euro currency for CAPITAL INVESTMENTS (since George Bush is seen as a moron everywhere in the world, Capital investments in USA are a mute point in World Intelligent community). Rupee has not appreciated (on the other hand, Dollar has sunk) against Euro, pound, yen, australian and Canadian dollar. What does that mean:
1)That would prompt inflation and interest rates to go higher in USA. That means prices everywhere that are being quoted in US dollar would have to adjusted (ie. raised); very very soon.
2)Immediately, Prices can be negotiated for exports to everywhere except USA, without any problem. Exports to USA can be negotiated too, since USA importers know better how bad the currency crisis is (unless the goods are coming from China, wherein, industry such as Leather industry would definitely suffer since China's currency is pegged to US currency at 7.75 Yuan). Then again, China would have to pay for this STUNT since Chinese govt owns 400 Billions in US $ debt that means, Chinese Govt would be hurt very badly, very very soon. So don't worry, WHAT YOU SOW, THOU SHALL REAP, applies to China.
Lot of people don't understand the devastating effect of rupee depreciation on common man.
In mathematics they call it boundary condition analysis. Similar approach could be used to find the appropriate value of Rupee.
For a theoretical case : Lets Assume 1$ = Rs. 1000
Now practically all our goods would be exported to outside world. Exports would be so profitable, common man wont get any products (whether it is grains or gadgets).
1 Liter petrol would be Rs. 1000 1 gram gold would be Rs. 16,000
Oil would be so expensive that even oil we get in India would get exported.
What effectively happened is, we are giving all our minerals and work force of every Indian man and eomen to the betterment of people outside India (like USA). What do we get for that?? USA will print their own currency and give it to you.
In bottom line, It is like plain old Slavery.
In boundary condition analysis. Lets look at the other side.
Lets assume $1 = Rs. 1
Now every thing in world will get imported. 1 Liter petrol will be less than Rs. 1. 1 gram gold would be Rs. 20. You can buy a good computer for Rs. 150. You can have a round trip for USA for less than Rs.1000.
You can buy a nice private jet for Rs. 50 lakhs.
Now You can't export any thing.
*Unless* the product you export is really really needed by the importing country.
Currently USA is importing like mad. They run huge deficit. Why do they do that??
Importing improves ordinary people lives. Now exporters of the country need to im
RE:Thought Experiment ...
by Nishant T on Jul 26, 2007 10:38 PM Permalink
That analysis is too one sided. Do you know ill-iffect of too much importing..well, for once the trade deficit will be too much, which will make us dependent a lot on foreign aid, good will etc. Too much import will cause many industries to be unviable..they will close, jobs will be lost..that will have even more bad effect overall. Why is China not degrading its currency..even after US pressurinsing it to do so.. I am not an expert on this subject, but know for a fact that there has to be a balance. And free market will ensure that balance..
RE:Thought Experiment ...
by Ajay on Jul 26, 2007 09:40 PM Permalink
Let Indian companies charge the same rate as american companies , the so called myth of Quality Indian consultants will be history within 1 year. I am an independednt consultant and WIPRO/TCS/InFOSYS charges less than i do. With Re at 25 to a $ i'll cream them anyday.
