Tuesday, May 29, 2012

What's wrong with the Indian Rupee?

The rupee is in a free fall against US dollar since last September. It has tanked from its high of 44 INR:1 USD to 55INR:1USD in the month of May; that's 25% decline in 9 months time. Indian rupee is the worst performing currency in the Asian region.

US Dollar v/s Indian Rupee


Everybody is concerned about it and, as usually, everyone is (wrongly) looking at the government and its central bank RBI for the rescue work. Business world wants RBI to take very proactive steps to stem the fall of rupee against dollar. Finance minister pranab mukherjee said, "It is a matter of great concern. We are watching the situation. The Centre is not (sitting) idle. We are trying to resolve (the issue)." And after that he, again as usually, blamed external forces for the weakness of rupee; he said, "This is due to the Eurozone crisis." 

Of course, finance minister is lying or is ignorant of economic laws. The exchange rate of rupee versus any other currency is determined by the demand for and supply of, both, rupee on one side and the other foreign currency on the other side. For example, ceteris paribus, if the demand for rupee increases, then, that will result in the appreciation of rupee against other foreign currency under consideration and if the supply of rupee increases, then, rupee will depreciate; and, if demand for rupee declines, then, rupee will depreciate and if its supply decreases, then, it will appreciate. On the other hand, if the demand for foreign currency increases, then, rupee will depreciate and if its supply increases, then, rupee will appreciate. If demand for foreign currency declines, then, rupee will appreciate and if its supply declines, then, rupee will depreciate.

Now we only have to see which factors are affecting rupee's depreciation in present. The fall of rupee is mainly due to the increased supply of rupee - due to RBI printing currency out of thin air. For these phenomenon, Indian government and RBI is entirely responsible. First of all, RBI's relentless printing of rupee is debasing the currency. Secondly, foreign investors are withdrawing their investment from India because the fragile hollow Indian economy is bursting after experiencing a prior artificial boom which was created by RBI by printing truck load of rupees; The growth rates are decelerating and the rampant inflation is not abating. On the other side, the politicians are making the investment environment in the country highly uncertain and unprofitable for the companies. Every now and then the government is announcing new regulations only to backtrack after few days e.g., the retail sector was initially opened for foreign investors and later was suspended. Finance Minister also declared that he and his government will not let India become a tax haven for the foreign companies e.g., they want to retrospectively amend the tax codes so as to mulct Vodafone company. These kind of lunatic legislation are creating total lawlessness in India which is scaring the companies. Moreover, one after another cases of political corruption is damaging the image of this country amongst the big investors e.g., Jim Rogers in an interview recently said that India is a good country for few days trip but is not suitable for long term investment because the government and people over there don't like rich people.

As we can see, the Euro zone crisis has nothing to do with the depreciation of rupee against other foreing currencies. In fact, in such crisis time in western world, if Indian economy was not hollow and Indian markets were free from the government interventions coupled with a monetary Gold standard (rupee defined in terms of underlying unit weight of Gold), then, rupee would have maintained its purchasing power without depreciating and in such a case foreign investors would've surely flock to Indian markets demanding rupee and in turn further strengthening it against other currencies.

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