The rupee fell to all time lows yesterday, and while on the face of it — that is great for exporters and people earning in dollars, I don’t think NRIs should be too happy about this recent fall.
A little more than a year ago I wrote a post explaining why the Rupee is falling, and in that I mentioned the Rupee’s fall is more a symptom of underlying problems rather than being the real problem itself.
I had listed down some of the problems in this fish bone diagram, and if you haven’t read my earlier post, then I’d recommend reading that here: Rupee slide is a symptom, not a problem.
I was reminded of that post when I was reading a great op-ed written by Dr. Shankar Acharya about this. Here is an excerpt from that:
The real cause of the rupee’s weakness is the relentless deterioration in our economic policies in recent years. A falling rupee is simply a symptom of the underlying disease: unsound economic policies. After hovering around one per cent of GDP or less since 1991-92, the current account deficit in our balance of payments exceeded 2.5 per cent of GDP in 2009-10 and 2010-11 and is likely to have swelled to a new high of four per cent in 2011-12.
If you are a NRI and send money to India periodically, the lower Rupee might make you feel good, and make you feel that you are richer, but this feeling is pointless not because of the daily movement, but the direction that this Rupee fall has taken. It has been depreciating steadily, and the depreciation is both the effect and cause of several problems that make living in India that much more expensive.
I’ve spoken about the causes earlier, and you can read them again, but on the other hand, with the Rupee fall — the oil bill will increase, gold import bill will increase, and it will fuel our trade deficit, which is already in very bad shape.
Bad economic policies are already leading to lower growth, lower stock market and a high inflation, and more of these policies are likely to continue this situation. If you ever plan to come back to India then these conditions are not good for you. Of course, if the current government starts fixing the problems, and the Rupee goes back to 45 – 50 range, then the current rate would’ve been great. I don’t see a situation where the economy improves and the exchange rate continues to depreciate.
What if you were just buying real estate or assets in India and just intended to own them as assets? In that case, when you convert them back to USD eventually – Rupee depreciation is even worse. Just ask the people who opened NRE fixed deposits. The interest they get is lower than the depreciation so they are net losers.
The current context of Rupee depreciation is bad economics, and there is nothing to rejoice in that.
I have used http://www.simplyglobal.com for comparison of daily exchange rates for different banks/companies. I also like the graph on their website that shows the trend of the exchange rate over the last year, as published by Reserve Bank of India. I haven’t asked any questions on their website but looks like they have a section on their website called community. Currently most of the questions so far are taxation related though and have been answered by CPAs from US and CAs from India.
I tried to look at the currency rates for Gulf based NRIs. You can see that AED (currency of UAE) has fixed rates to USD (i.e. USD 1 = AED 3.6675) since the time they started their currency way back about 40 years. So UAE currency has a fixed link to US currency and except 2008 fall- they have been doing extremely well. and this country had tremendous progress with leaps and bounds inspite of adverse climatic conditions and even after 2008 fall. Whereas Indian rupee was ( I understand) at USD 1 = Rupee 1 in 1947 / Rupee 7.50 in 1966/ Rupee 8.40 in 1975/ Rupee 17.50 in 1990/ Rupee 34.96 in 1995 / Rupee 47 in 2000 / Rupee 45 in 2010 and now at Rupee 60- depreciating regularly. I know that their are basic difference between the economies of UAE and India, however, this country take care of their economy interest very well inspite of severe fall of 2008. I think we would have fixed the currency rate of Rupee to USD from the independence days – then India would have definitely been in a better position. Your views are welcome. These are absolutely my personal views and it is from broader perspective of indian economy.
It is not possible to maintain a fixed exchange rate without able to sell Dollars in the face of a depreciating Rupee. That’s what you must have read also that RBI sold these many dollars when Rupee touched 60 to defend the Rupee or something similar to this.
China has been doing something similar in order to maintain the exchange rate that it wants. India can’t possibly do something similar because the dollar reserves will run out very quickly and India won’t have enough to pay for its imports.
Also, Indians should look at the ETF for Hangseng index listed in BSE – that is another way of hedging the currency. Hangseng is HK stock and HK $ is pegged against US$ so it is an indirect ploy to invest in US$ and also get exposure to China / HK.
But from an incremental perspective, current and future savings translate at a better rate. So they will gain there, it balances out. Otherwise nris should consider fcnr us dollar deposits if they want to bring back the money
Hi
There is a good post on this site
http://www.quantspartner.com/RupeeDepreciation.aspx
i used to invest only in Indian equities, but have started to purchase US equities now.. If the rupee continues to depreciate, I hope to get comparatively better returns.. something like hedging my portfolio..
your thoughts on this? (i m not an NRI)
Yes Milind, this is definitely a good strategy and I have written about it earlier. You should definitely do that and this deserves a full post.
I think the Rupee depreciation relative to the dollar has a lot to do with inflation rate differentials between the two countries. Its not possible to have a higher inflation relative to another country as well as a stable exchange rate without the help of the Reserve bank.
The RBI had intervened yesterday by shelling out some dollars and supporting the Rupee but given the structural problems, such actions will only serve to give better entry points to traders.
What I find interesting is that despite the massive amounts of dollar pumping via QE (the Fed is currently buying as much as 70% of all the bonds issued by the US Govt), the dollar is appreciating against most currencies. http://static4.businessinsider.com/image/4d6e7e054bd7c80e790e0000/chart-of-the-day-buying-treasuries-pimco-march-2011.jpg
It is not just inflation as there is hardly any difference in inflation among western countries or even Japan but USD rate is moving quite differently in all of these places.