In the backdrop of Indian rupee falling against strong global currencies - from symptom to root cause analysis.

1. Rupee volatility and its impact on
Indian market
Organized by: ICSI (Nagpur Chapter)
& Business Standard
Prof. Ranjit Goswami
Seminar on

2. Questions: Why rupee falling
• Understanding rupee’s historical fall…volatility?
• Challenges (and opportunities?):
– local and global
• Inherent Indian economic challenge
– Growth vs. sticky inflation
– Supply side constraints
• Current account, capital account & BoP
• Government role…quo vadis reform?

3. So: What now?
• Impact on Indian markets
– Financial markets
• Stocks, bonds, asset class…gold to real estate
– And to economy at large
• At ‘mandi’ markets…inflation…’Mehangai’
• Policy implications
– Can ‘jawboning’ help?
– Or need difficult, more importantly correct actions?
• Comparative study from the U.S., E.U., Japan &
China

4. Rupee Bungee Jump!
Source: Surendracartoonist, Surendra, Facebook & Hindu

5. Historical rupee : dollar, at par in 1947
1950 4.79 1985 12.36 ¥(CNY) 2.9366 (1981 = 1.705)
1955 4.79 1990 17.50 4.7832
1960 4.77 1995 32.42 8.3510
1965 4.78 2000 44.94 8.2784
1970 7.56 2005 44.09 8.1917
1975 8.39 2010 44 to 50 6.7695
1980 7.86 Now 62 6.1090 (record high on 16th Aug)
: :
Since 1981, Chinese
¥ has depreciated
by 358% against
US$, Indian rupee
by 800%. Since
2000, Chinese ¥
appreciated by
26%, INR down by
38%.

6. Therefore, volatility?
• Understandably, RBI to Ministry of Finance to
Govt…
– All want to project as rupee volatility…business-as-
usual
• Volatility means ‘our currency value is down 62
times, 6200%, in 67 years…?’
– Need to refer to a new dictionary…sorry.
• More aptly, Indian rupee is getting ‘stripteased’
of its value…
– Question is…how much more to strip…not funny for
one getting stripped
– Before Lord Krishna comes and stops ‘Draupadi Vastra
Haran’

7. Leads to funny FB postings
Earlier, with one rupee,
one could have bought
enough food staff –
therefore one sees
paddy/wheat grain-bearing
stems in it.
Now, with one rupee, one
doesn’t get anything –
therefore one sees Indian
‘Thumbs-up’ – meaning
nothing.
Source: Facebook

8. & more FB postings…
Source: Facebook
Size always
does not
mean
obesity…as
in this case

9. No country could ever attain strong
economic power status by devaluing
its currency
- History says

10. Market, & currency volatility
Year Sensex Rs:$ Return
in
INR*/$
DJIA Return Shang
hai
Comp
osite
Yuan:S Return
(home &
FII)
1992 1950 25-26 3100 290 5.5
2013 18598 62 9.5X 15112 4.87X 2068 6.11 7.13X
3.92X 6.41X
*Without adjusting for real inflation, not real return

11. Historical interventions
• Plaza accord – 1985
– Depreciate US Dollar against Japanese yen &
German’s DM…
– Yen moved up from 300:1 against US$ to around 100
– And still maintained export competitiveness
• Until recently
• Euro (€), introduced in 1999 at
– €:$ of 1.1743
– Moved up to 1.6038 in 2008, lowest in 2000
• ECB intervention in coordination with Fed, BoJ, BoE, BoC

12. Japanese yen:$...Volatile?
Source: Wikipedia, Plaza Accord

13. Euro:Dollar, volatile?
Source, Wikipedia, Euro

14. Indian ‘Big-Bang’ Economic
Reform of 1991
Was it so really?
In the right direction…?
My opinion: media made much ado about
nothing…coincidences of liquidity
Costly policy mistakes continue

15. "The great enemy of the truth is very
often not the lie, deliberate, contrived
and dishonest, but the myth,
persistent, persuasive and unrealistic.”
- John F. Kennedy

16. LPG – explosive, deal carefully
• Liberalization L
• Privatization P
• Globalization G
• We have been often told and retold LPG solves all
our problems.
• A ‘Utopian’ panacea to poor growth &
development…including organizer of this seminar
– Business Standard
»Really?

17. You can’t have a ‘Wall Street’
before having main streets
- Old proverb or common sense?

18. Washington consensus reform vs.
others, particularly Beijing
Consensus
Experience from South Korea to
Taiwan to other EA economies

19. ‘But what is clear is that Japan and
other East Asian countries followed
a markedly different course from
that recommended by the neo-
liberal “Washington Consensus.”
Their policies worked; all too
often, those of the Washington
Consensus failed miserably.’
Joseph Stiglitz, SEJ, East Asia’s Lesson
for Africa (2013)

20. And therefore, no true Wizard of
Oz for Indian economy
And for rupee fall too…
Those who had an opposition…muffled
by media & lobby power

21. The ‘so-called wizards’ asked for…
• More ‘reform’ whenever there was a visible
problem of the ‘wrong’ reform.
• But unfortunately, we never questioned, what
has this reform achieved?
– And likely to achieve, going forward?
– Even ignoring stats on poverty, malnourishment,
rising inequality, jobless growth, etc.

22. ‘Inflation is always and everywhere
a monetary phenomenon.’
- Milton Friedman
Please note, role of monetary policy
in creating supply is limited.

23. Why this sticky & stubborn inflation in
India?
• Took some time for national level
understanding on the supply side constraints
• Simply put, money supply/circulation exceeds
goods & services supply
– At almost lowest per-capita level consumptions
– For a nation of 1.2 billion, soon to surpass China
• And Government felt happy to withdraw from
supply side
• The costliest mistake…we probably ever made

24. High-growth-high-inflation inevitable
myth
Even 6.5% was
an aberration
for
China…growing
steadily at
higher rate with
much lower
inflation than
India
Even more than 4% different in CPI-WPI has been observed in India, at
times they are even divergent

25. And the liquidity binge
• Enough analysts pointed out the real reasons
– Behind near double-digit GDP growth for few years last
decade
• But we felt it to be ‘business as normal’
– When it was never normal
– ‘Chest thumping’ news headlines became normal…
• Now, we have not yet seen tightening of real liquidity
– The rupee falling because of possibilityof
tightening of liquidity binge that lasted more than a
decade

26. “You never know who's swimming
naked until the tide goes out."
- Warren Buffet
It is dangerous to go out to deep sea
for fishing in a country boat, in
present financial world.
- My own experience with leveraged derivatives

27. Alternatives
• LPG – but create supply…competition is good
– Examples from education to healthcare to power, infra
• Don’t live in an ever short-supply scenario
– Examples of financial markets & profitability from
India & China
– Or myths of competitiveness of Indian companies
• Then, where are the exports? Trade deficit to CAD…
• China ‘LPGed’ more than India, at right time,
– But also invested hugely in infrastructure
– Capitalism with Chinese characteristics
• A nation of a billion plus are not same as others…

28. Where is the money? We are
running huge budget deficit too.
It’s there…

29. Show me the money, honey…
Source: The feeding frenzy of the kleptocracy, Hindu, 16th
March 2013, & ‘Stop subsidizing the rich’
Does not include other input subsidies – like mining
assets, or land; or even unsustainable socialism…all put
together – much more than $100 billion/year

30. Some other stats…
• One of the lowest Tax : GDP ratio, even US talking
about taxing at higher rate for the rich
• High trade deficit, high current account deficit
– $190.91 billion in 2012-13
– Exports, as a % of imports, is less than pre-reform
days
• CAD higher than even the U.S.
• Examples of budget deficit & CAD from
– The U.S.
– Japan
– China
– EU, particularly Germany.

31. Picture isn’t complete without…
• Falling savings, and with government borrowing,
32% of GDP & then Govt. borrowings
– Household savings lowest in 22 years
– 7.8% in FY 12, 9,3% in FY 11, 12.2% in FY 10
– Less for investment…leading to lower supply
– On top of high IR due to high inflation
• High inflation High interest rates
High cost borrowings low investments
• Point is: negative feed back loop

32. Essentially meaning…
• We are relying on foreign capital
– To meet our CAD
– To meet the gap of our economy’s investment need
against that of savings
• And the liquidity binge party is not yet over…
– Merely a possibility
– US 10-year Treasury moving up from 1.4 in 2012 to
2.83% recently
– Helicopter Ben’ vs. unknown dove/hawk as Fed
Chairman
– In India, Rajan in place of Subbarao in RBI

33. Definition of Current Account
• ‘balance of trade (i.e., net revenue on exports
minus payments for imports), factor income
(earnings on foreign investments minus
payments made to foreign investors) and cash
transfers.’
• Source: Wikipedia

34. Current Account Deficit
• India’s ‘current-account deficit and the external
debt it needs to roll over in the next 12 months,
amount to about $250 billion. Its foreign-currency
reserves are only just able to cover this.’
– Economist, Dependence Day
• Loan of $170 billion is to be rolled over in less
than one year.
• A look at how India’s external debt has risen over
the years

35. India’s external debt…
Since 1991,
both GDP &
external debt
sort of
quadrupled

36. So, what now…?
• Are we sinking? Another 1991?
• ‘Forecasting is like reading entrails’ – Bernanke
• No denying, we are between the devil and the
deep blue sea
• If QE/liquidity binge really slows down
– We would have in trouble
– Intensity of trouble depending on intensity of
monetary tightening in the US, EU, Japan, China
• And we might have missed the manufacturing
bus, due to existing capacity in China

37. So, answer is or isn’t
• Answer is to create capacity
– By LPG and also by Government, where shortfall
of private participation is.
• Cancer patient:
– don’t drain available forex in defending rupee
– Slow bleeding vs. fast correction.
• And answer surely isn’t more ‘mindless
reform’ as it happened in last two decades
– Good money after bad money…

38. 38

39. 39

40. Please, please… do not add
more cows, as in above, as
more ‘reform’

41. ‘Thankfully, out of time. Will be
happy to answer, or possibly evade
your questions…’
Thank you for your time…
Ranjit.goswami@gmail.com
Dean (Acads), IMT Nagpur