RBI curbs on Forex outflows_Does it prove liberalization has failed?

[கால பைரவன்]

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Shri Kunjuppu,
From your above post it becomes clear as to how far removed from the ground realities of India you are. May be you are getting a bird's eye view of the country during your visits and otherwise, but the rupee-$ value immediately causes petrol & diesel prices to go up and since the PDS is pathetically weak, everything from common salt to camphor (உப்பிலிருந்து கர்ப்பூரம் வரை - as the saying goes) become costlier. I could also have taken a non-chalant attitude like your good self or Shri Prasad, if I were one of the upper classes in India, like Rahul Gandhi (poverty is a state of the mind) or Montek Singh Ahluwalia (Rs. 40 lakhs for his office bath room). Unfortunately, I am not and I feel, even now, that there will be a few members here who may find these price increases and therefore the rupee-dollar rate, of importance to our daily lives.
If I am wrong in this, my apologies.

You are correct in the sense that as long as we depend on petrol/crude oil for our fuel and energy, dollar will rule the roost because these are traded for dollars and it takes away our forex.

What are we doing to curb this problem? Are we putting in any efforts on identifying alternate fuel resources such as natural gas? Are we improving our public transportation and infrastructure so that we can use these fuels efficiently.

One major problem is that the number of personal vehicles have grown at an enormous rate but the infrastructure to support such growth is lacking. As a result our usage of fuels is very inefficient.

Owning a bike/car was a status symbol. It probably still is, although one can see that people are increasingly frustrated with traffic and pollution. I know of several people who will gladly use public transportation if it were reliable and provides a decent comfort level.

Finally it all comes down to lack of governance. We cannot escape third world status without good governance.

 

[கால பைரவன்]

Dear Sangom,
If you mean that through the means of economic liberalization we have enabled the politicians to loot away the wealth from India to foreign shores, I agree with you.
The once stationary bandits have become now roving bandits to put it very crudely!

 

[auh]

.Logically, what is happening is, due to inflation in India prices are going up crazy and the effective buying power of a rupee is decreasing. People who work in IT companies in India, get Salary hikes ranging from 15% to 30% every year, where as in America the average hike per year in salary is around 3%. The logical reason for the disparity in the hike is the inflation.

Just put in the inflation rate, time period and current value to get the real value. Inflation eats away the purchasing value of the rupee. So, investors must ensure that their investments are growing at a rate higher than the rate of inflation. Any return less than the average inflation rate will make your investment portfolio weaker in real terms.

What then, is the cause of this inflation that has caused the rupee to lose its value considerably? Don't you think that the mad consumerism, blanket attempts at modernisation etc are some of the reasons for the prices to be artificially hiked up? "Korangu kaile poomalai" situation is what liberalization has become. Indian brain has not evolved yet, perhaps Charles Darwin would think, for liberalization to succeed in India.

Better quality products are exported as they fetch in forex. Some of these come back in the guise of popular brands at a higher price.

While what you are saying about real value makes sense theoretically, we have to, in the real world, curb the cause of inflation.

 

[auh]

it makes exports cheap and imports expensive.

And India has a trade deficit - imports are significantly higher than our exports. Perhaps that does affect the common man, after all?

the floating value of the rupee is an inborn automatic economic's way of adjusting to realities - and there is no value of pride in it. just plain economics. what we need is more export and more jobs.

The value of the rupee can be easily manipulated, just as the sensex is. The highlighted portion is what India has been trying to achieve, by export credits and incentives.

the only ones who should really worry about the value of the rupee vs dolla, are those from india planning abroad trips or foreign education. the vast masses shouldnt care.

For every dollar that India pays for import, more rupees drain out from the system. So higher the rate, more the drain. Is it not a drain of wealth (symbolically)?

Moreover, the higher rate means that goods and services become more expensive as they have a direct correlation. Which incidentally affects the vast masses.

 

[vgane]

We have also imported Capital goods with no holds barred which has stifled local manufacturing and hit the GDP

Quote

The average annual import of manufactured goods during 2001-2004 (the NDA period) was just $600 million. But from 2004-2005 to 2012-2013, the average soared to $5.5 billion, by 8 times. The nominal national GDP grew by 3.2 times in this period, by just a third of the growth of manufactured goods imports. The 9-year UPA regime saw manufactured goods imports of $50 billion against just $2.3 billion during the NDA regime. Obviously, the capital goods import did not add to, but actually destroyed, national production, ably aided by import of manufactured goods.

Unquote

Reckless imports put rupee on ventilator - The New Indian Express

 

[sangom]

Sir,
My post was in reply to your post lamenting that India is not ready for democracy, and Indians are nor capable of handling their affair. I can understand that from a Pakistani, but coming from you it seemed like a tantrum.

India and Indian do not need pity, but some backbone to stand up. Yes the import of energy sector does add to the inflation, but like Mr. K said in India inflation is rampant and is not because of energy cost alone.

Logically, what is happening is, due to inflation in India prices are going up crazy and the effective buying power of a rupee is decreasing. People who work in IT companies in India, get Salary hikes ranging from 15% to 30% every year, where as in America the average hike per year in salary is around 3%. The logical reason for the disparity in the hike is the inflation.

Just put in the inflation rate, time period and current value to get the real value. Inflation eats away the purchasing value of the rupee. So, investors must ensure that their investments are growing at a rate higher than the rate of inflation. Any return less than the average inflation rate will make your investment portfolio weaker in real terms.

Shri Prasad,

What I wanted to say was that India got freedom at a time when Indian population, including its leaders, were not mature enough to handle either freedom or democracy.

Mere backbone, standing up, etc., by Indians will only aggravate the problems, according to me. What has happened during the last 9 or 10 years of UPA is very sophisticated looting of india and indian wealth. Possibly many people fail to realize this. Even if NDA or BJP comes to power next, at the centre, they are unlikely to take a new and untrodden path when the path cleared and smoothened by UPA for a decade is ready before them. That will be ultimately the ruin for this country. As an individual who can only bemoan the sad fate of his country, all these may appear to be mere "tantrums" for a person from outside, I agree. But I am comforted to see that there are a few who seem to agree with my view.

 

[prasad1]

The problem has been brewing for a long time. We have been using capital receipts to finance current expenditure. A company prospers if it borrows money and invests it in factories. It fails if it uses the borrowing for the pleasures of consumption. Debt begins to accumulate and at some point investors become weary and exit.


That is when the company collapses. The same thing happens to a country. Investors deposit dollars with Indian banks. Banks sell these dollars to Indian importers. The crucial question is whether the buyers use these dollars to make investments in new factories or to import Chinese toys and other items of consumption? The country prospers if the dollars are used for investment but collapses if they are used to import items of consumption. The toys soon go into the dustbin but the country’s debt remains standing.

 

[prasad1]

The basic mistake that policymakers made was misreading the symptom as the disease. The falling rupee and rising CAD are just symptoms of the illness which is the sustained fall in manufacturing growth in recent years and the consequent loss of investment opportunities for both FDI and FII investors, on the one hand and the resurgence in the U.S. economy, on the other. And the cure for both is the same: encourage the manufacturing sector by removing hurdles to investment and production. That will, in due course, get the rupee the respect it deserves.
When symptoms are mistaken for disease
The_Hindu: RAGHUVIR SRINIVASAN

 

[prasad1]

A fierce selloff in many emerging currencies shows no sign of abating as the expected withdrawal of U.S. monetary stimulus prompts investors to shun markets seen as riskier because of funding deficits, slowing economies and inflation.


The rupee fits that bill, as do the Indonesian rupiah, the South African rand and the Brazilian real. The rupiah plunged to four-year troughs on Monday while the rand lost another 1 per cent to bring year-to-date losses to almost 17 per cent against the dollar.
As in India, Brazil's previously fast-growing economy has slowed, disappointing investors and Brazil, like Indonesia, has seen a sharp deterioration in its balance of trade due to a cooling in China's appetite for commodities.
Brazil's real extended last week's fall of more than 5 per cent fall to trade at its weakest level since March 2009 even as the central bank sold nearly $3 billion worth of currency swaps, which are derivatives that mimic an injection of dollars in the futures market. Like the rupee, it has been hammered by doubts over the efficacy of policy actions to stem the rout.


The rupee and the real, respectively, have been the worst performers in Asia and Latin America since late May when the Fed first signalled that it may begin winding down its monetary stimulus this year. India's currency has lost 13 per cent against the dollar this year while the real has plunged 15 per cent in the same period.

 

[vgane]

The so called Developing world represented by BRICS except China are undergoing a free fall ...They did not experience this in 2007-08 and were acting as a bulwark against the meltdown in the developed world and brought in some stability to the Financial markets

With the global economy now out of recession and US heading for bumper manufacturing output, it is a sad commentary that the BRIC countries have not learnt their lessons and are heading for excessive CAD, high inflation and low growth pangs

 

[Brahmanyan]

Why people in our country invest in Gold ?

Why people in our country invest in Gold ? This is an interesting subject. First we should look into the Social structure of India, where majority of the population still live in villages. Life of most of the people who live villages depend on agriculture. The people at large have to look for safe investment of their savings for eventualities and future. Only commodity that can be saved easily, and available at the time of need is precious metal like Gold and Silver. In a long term investment, only value of Gold compensates the vagaries of inflation. At the time of need the old lady in village knows that she can encash Gold much easily than other investments.

Currency Note issued by Reserve Bank of India is a form of Negotiable instrument known as "promissory note", which is used as a legal tender for certain value. The paper currecy gets its value on the guarantee of the Government Bank. But we do not get the same value of our investment in paper currency when we encash it after say ten years. If the money is kept in a Bank or Financial organisation it earns interest, but this will never compensate fully the erosion of value of Rupee during the period. Over the years real value of Rupee has eroded considrably resulting in the fall of national economy to abysmal depth.

Fall of Standard Rupee from Silver to Steel:
Here is some additional information on the History of Rupee.
As per the Act XVIII of 1835 the weight of the rupee coin was standardized at 180 grains troy (1 Tola or 11.663 8038 Grams) and its fineness at 11/12 (i.e. 165 grains of pure silver and 15 grains of alloy) Diameter 1.3". The rupee coin would bear the effigy of the then king of United Kingdom. This standard continued till 1939. Due to the World war II in 1939 the price of silver rose high. The metal value of the silver rupee coin surpassed its face value. Hence the Government decided to issue rupee and other Standard Silver coins in quaternary alloy consists of 50% silver,40% copper, 5% Nickel and 5% Zinc.

In the year 1947 the Rupee Coin was issued with Metal composition Pure Nickel and the diameter changed to 1.1".

In 1975 with a view to conserve Nickel which was in short supply throughout the world, the Government of India decided to issue rupee coins in cupro nickel Metal composition – Cupro-Nickel (75% Cupper and 25% Nickel)
From 1975 to 1982 with less weight of 8grams. And the weight was further reduced to 6 grams from 1983-1991.

Ultimately Rupee coin was issued in Stainless steel from 1992. With metal composition of Ferrite Stainless Steel (80.5% Iron, 18% Chromium) with Weight - 4.85 grams and Diameter – 25 mm.

(information gathered from net resources)

Brahmanyan,
Bangalore.





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[auh]

LCD/LED TV imports into India would be charged duty at 35% :-(

As if this would magically adjust the rupee.

 

[auh]

Deutsche bank has forecasted that the INR may go down to 70 against the dollar.

 

[vgane]

Very smart tweet from Malini P of The Hindu

[h=1]An electronic news ticker in NY's Times Square says that the US Fed retreat has "roiled" the rupee & India. No spin-doctor can fix that! [/h]

 

[kunjuppu]

here is a smart intelligent allknowing answer from a friend of mine, who is a prof in usa, and seen often on financial t.v. stations

In the long run, the exchange rate between any two countries' free-floating currencies is almost exclusively a function of the differences in the inflation rates and real (i.e., inflation-adjusted) interest rates between the two countries. This is explained by an age-old economic theory called purchasing power parity (PPP) which says that similar goods should sell approximately at similar price in the two countries, adjusted for exchange rates and borrowing costs. PPP says that if country A's inflation rate is higher than B's (keeping interest rates constant), its currency will depreciate relative to B's. Similarly, if A's real interest rate is lower (keeping inflation constant), its currency will depreciate.

Under this theory, the rupee is weakening against the dollar because India's inflation is quite high (and most likely much higher than the official rate) whereas US's inflation rate is almost zero, and because India's real real interest rate is quite low compared to the US rates. In fact, India's real interest rate is very likely negative and possibly falling further now while the US real rates are now going up.

All that is in the long-term. In the short term, any number of other (both rational and irrational) supply and demand factors can move the exchange rate and it is almost impossible to try to explain the movement. But the most likely short-term supply factor now is that foreign investors' money is leaving India for various reasons (including due to political uncertainty). This has become a huge problem for the rupee because Indians are reinvesting almost all of their savings into real estate and gold and not into the productive economy, making the Indian stock markets and government bond markets, as well as Indian companies, excessively dependent on foreign (FII) money. Since US and European interest rates are going up and the markets there are doing much better than Indian markets, the foreign money for stocks and bonds is flowing outward (hopefully temporarily), causing the rupee to weaken dramatically in the short-term.

As a side note, a big source of the inflation in India is the ongoing massive real estate bubble and the huge black money economy it creates and
supports (which mainly benefits the politicians). One way to burst this bubble is to raise interest rates. That will also halt the rupee's slide.
But that will also hurt a lot of people -- and the politicians. Given that there is an election coming soon, the RBI may be politically unable to raise
interest rates to cool the inflation and risk pushing the economy into a recession.

Overall, though, in the long-term, Indian inflation is the main source of the rupee's fall. Until it is brought under control, the rupee will keep
going downward. In other words, keep an eye on the skyrocketing onion price, not oil price (which has been stable).

Hope this helps.

 

[auh]

I think there could be perhaps another angle to this. India had always had a trade deficit, and manipulating the dollar would in turn affect the fortunes of the rupee.

We are witnessing a scenario that India has to look at long term avenues to sustain dollar inflows. Short term knee-jerk measures such as raising NRE deposit rates, raising domesting lending rates, charging duty on import of luxury items etc., are not proper economic measures. Hence India would be forced to seek foreign participation in many more areas, and perhaps, may open up to investment, more than what is necessary. This is a controlling manoeurve targetted to gain economic stranglehold on India. When India buckles is a wait and watch.

This, perhaps, is the face of future wars.

 

[kunjuppu]

I think there could be perhaps another angle to this. India had always had a trade deficit, and manipulating the dollar would in turn affect the fortunes of the rupee.

We are witnessing a scenario that India has to look at long term avenues to sustain dollar inflows. Short term knee-jerk measures such as raising NRE deposit rates, raising domesting lending rates, charging duty on import of luxury items etc., are not proper economic measures. Hence India would be forced to seek foreign participation in many more areas, and perhaps, may open up to investment, more than what is necessary. This is a controlling manoeurve targetted to gain economic stranglehold on India. When India buckles is a wait and watch.

This, perhaps, is the face of future wars.

i dont think there is any political motive or intention to 'stranglehold' india anywhere.

money is like a prostitute. it will service anyone who gives the highest returns. even though indian interest rates are high, due to high inflation, the 'real' return is in negatives, as my friend says in post #40.

nobody wants to rule india either. who would want to inherit 1.2 billion people and take responsibility for feeding clothing sheltering them. money seeks an opportunity to make money, and in india, there is lots of opportunity because the market is so huge.

even if 1% for example are rich, that is 1.2 million people. sheer numbers offers opportunities at all levels. unfortunately corruption eats away a fair bit of our wealth created. and mismanagement comes close. add to it, the constraints of body politics.

the u.s. interest rate is 1% return on savings. but inflation zero. so money leaves india to the usa. overall all money from all over the world are going to usa. including the canadian dolla.

atleast that is what i think.

 

[prasad1]

i dont think there is any political motive or intention to 'stranglehold' india anywhere.

money is like a prostitute. it will service anyone who gives the highest returns. even though indian interest rates are high, due to high inflation, the 'real' return is in negatives, as my friend says in post #40.

nobody wants to rule india either. who would want to inherit 1.2 billion people and take responsibility for feeding clothing sheltering them. money seeks an opportunity to make money, and in india, there is lots of opportunity because the market is so huge.

even if 1% for example are rich, that is 1.2 million people. sheer numbers offers opportunities at all levels. unfortunately corruption eats away a fair bit of our wealth created. and mismanagement comes close. add to it, the constraints of body politics.

the u.s. interest rate is 1% return on savings. but inflation zero. so money leaves india to the usa. overall all money from all over the world are going to usa. including the canadian dolla.

atleast that is what i think.

The strengthening of the US economy suggests that the US central bank will reverse its easy money policy from September itself. For India this is a bigger worry. Higher yields are attracting money to safer US treasury bonds from risky emerging markets with big uncovered import gaps like India, Indonesia, South Africa and Brazil.
Oil prices are rising, and a weakening rupee is stretching the import bill. Unless the government raises fuel prices - mainly diesel - the subsidy burden will rise, defeating Chidambaram's efforts to an extent. The Oil Minister has indicated that diesel rates will be raised by Rs 2 to 3 a litre, but this is unlikely to happen when Parliament is in session.

 

[auh]

nobody wants to rule india either. who would want to inherit 1.2 billion people and take responsibility for feeding clothing sheltering them. money seeks an opportunity to make money, and in india, there is lots of opportunity because the market is so huge.

Control over a country does not always mean "ruling" over, like the kings of yore. Rather this control works at many levels - bilateral trade, inflation, political (govt) instability, grants and concessions, sharing of technology and know-how, strategic partnership, etc., and, in the long run, ensures that the controlled country does not cross over the guidelines/interests of the controlling group.

What I meant was that even some of the Govt undertakings may perhaps come under foreign corporate yoke.

Of course, these things would not be so direct so that everyone could deduce the underlying thoughts, but having said that, I do not mean that I have some sort of insight or that I am putting down your opinion. Just my thoughts.

 

[prasad1]

The weakening rupee has had little impact on Indian travellers who remain eager to travel and have not cancelled or altered their plans waiting for the rupee to stabilise, leading travel portals said Monday. According to Yatra.com, which conducted a survey, 62 % of the respondents are pursuing their holiday plans. The survey said that Southeast Asian countries are the destination of choice, followed by Europe, the US and Britain.


"While 43 % of the respondents would like to travel within India, 45 % said that the location would depend on the expenses involved," said the survey.


"We have been periodically mapping travel trends amongst our base of travellers to get a sense of their mood, and this latest survey seems to suggest that the market is still upbeat on holiday travel despite the depreciation in the rupee," Sharat Dhall, president, Yatra.com said.
"Travellers are confident that the currency depreciation will be offset by attractive discounts offered by hotels and flight operators," he added.
The survey was conducted among 6,000 individuals, majority of them aged between 25 to 45 years.

 

[auh]

The rupee has crossed the 66 mark today, according to news. Apparently, strong $ demands has further weakened the rupee.

Some analysts predict that this downward trend will continue and probably touch the 70 mark.

Chidambaram's statements do not seem to sway the rupee fortunes as much as that of Marc Faber's.

 

[Vaagmi]

My thoughts on this:

India has built up a substantial forex reserve and all of it is in USD and invested in US T.Bills safely. India has also built up a large gold reserve which can always be easily pledged with WB to raise any temporary loan in USD to stave off a looming crisis. India today is not a PL480 dependent poor 3rd world nation having a hand to mouth or ship to ship existence as far as the food grains are concerned. India today exports wheat and is among the top 5 nations of the world that export wheat. In rice cultivation India is self sufficient. In spite of all this if USD is rising against Indian Rupee there can be just three reasons. 1) India is deliberately allowing this to happen so that Indian exports become more competitive and cheap.2)India at the Government level itself is buying USD in a big way to finance some huge defense purchase which it does not want to reveal in the public domain. When Govt. comes to the market to buy millions of USD the market forces act and dollar becomes dear. 3) Some international cartel is hammering down Rupee in order to bring round India to extract certain business concessions and India is not playing balls.

Any way we need not lose sleep over USD rallying because what goes up has to come down. India is not a push over to be cowed down by such aberrations. India's economy and output is robust and we will not starve or be bombed to stone ages tomorrow because USD is becoming costlier.

There is more than what meets the eye here. Thanks.

 

[prasad1]

There are several reasons for as to why rupee is falling against Dollar. Rupee hits 11 month low in the last 1 year against US Dollar. Below are the major incidents in the last one year which has impacted for such fall.
Foreign Institutional Investors (FII’s) took away $ 90 Mn from stock markets.
RBI Poor inflation outlook
GDP has fallen to 10 years low in the year ended Mar-2013. Poor performance of farming, manufacturing, mining sectors has led this low growth. GDP has slowed down to 4.8% for the period Jan-2013 to Mar-2013.
As per forex dealers, dollar demand related to defense payments and month end imports also impacted such fall in rupee value.

Oil companies import up to 70% of oil from other countries. Due to deprecation of rupee value, they need to impact the same quantity with higher price. Due to this, either they would incur losses or Government can increase the fuel prices. This would increase the inflation.

 

[Vaagmi]

Dear Prasad,

I continue with my thoughts:

Rupee hits 11 month low in the last 1 year against US Dollar. Below are the major incidents in the last one year which has impacted for such fall.
Foreign Institutional Investors (FII’s) took away $ 90 Mn from stock markets.
RBI Poor inflation outlook

FIIs usually take away their funds just as they brought it in. The speed with which INR fell is not comparable to the speed with which the FIIs withdrew because FII funds have necessarily to be converted into USD to be taken back and the losses will be substantial in a falling market. FIIs usually do this taking out in tranches just as they bring it in tranches. Moreover FII size wise even though substantial is not adequate to cause such a big flutter in the forex market for the reason that the market size is much larger. 90 million was taken out over a period of time and this is not the size of Indian forex market.

GDP has fallen to 10 years low in the year ended Mar-2013. Poor performance of farming, manufacturing, mining sectors has led this low growth. GDP has slowed down to 4.8% for the period Jan-2013 to Mar-2013.

GDP has just slowed down and has not gone south.

As per forex dealers, dollar demand related to defense payments and month end imports also impacted such fall in rupee value.

I still believe that we have not yet heard the full story. There is something missing.

Oil companies import up to 70% of oil from other countries. Due to deprecation of rupee value, they need to impact the same quantity with higher price. Due to this, either they would incur losses or Government can increase the fuel prices. This would increase the inflation.

A large part of crude import is covered by back to back forward contracts. Only spot purchases can cause havoc. If your point is that the price increases on rupee terms in which it is ultimately accounted in Govt's books, there is a valid point. But can it be that the recent news which I read in news papers about RBI having in its chests more notes than what it printed so far and could account has a pointer in it? Those members who are good in monetary theory can throw some light on the consequences of such discrepancy in the money held in chests.

I think if there are more notes in circulation than what the Govt/RBi intends and prints as part of its management of economy, all its expectations about inflation, forex values, growth etc will come to nothing. Some one else who is printing Indian currency abroad and circulating it in India become the ultimate boss who decides the economy's progress. Has this innocuous news item any bearing on the forex crisis? I think if the quantity in circulation of this printed counterfeit notes is substantial (as it appears to be) the Govt. can never be sure about anything and will not be able to do anything about the USD going up and up and away. Thanks.

 

[sangom]

Dear Prasad,

I continue with my thoughts:



FIIs usually take away their funds just as they brought it in. The speed with which INR fell is not comparable to the speed with which the FIIs withdrew because FII funds have necessarily to be converted into USD to be taken back and the losses will be substantial in a falling market. FIIs usually do this taking out in tranches just as they bring it in tranches. Moreover FII size wise even though substantial is not adequate to cause such a big flutter in the forex market for the reason that the market size is much larger. 90 million was taken out over a period of time and this is not the size of Indian forex market.

An MD of a stockbroking company said in TV news that some $2.7 billion has been withdrawn by foreign investors during this recent slide. He predicted that rupee is likely to fall to 70 or even lower and that hopes of regaining can be expected only by October when US will once again reach its borrowing limit of some 17 trillions of $.