This article of my blog is dedicated to very very dear friend of mine whom I love to call Pingu Penguin, who made me to come back in world of Economics. And off course to Prof Perry, who had added flavors and acted as catalyst for my keen for economics. Economics, my favorite subject which I always aspire to explore more and more…. But my job being centered more towards banking domain gives me lesser flexibility. It had been a large gap….. Which I didn’t realize, till I came back to it couple of days back…. Feeling like college days have come back…..!!!
Rupee is appreciating and many Indians staying abroad and others who have less confrontation with economics see it as boon and feeling happy about it..!! When we have got two eyes better use both and visualize what boon and bane this is carrying with it…. Economics is NOT about what to think, but HOW to think......!! Its not a body of concrete truth, but an engine for the discovery of the truth." WAY of thinking in a very systematic, rational, logical manner. What is Economics about? Its about how people make choices…! First principle of economics is that we live in a world of scarcity. Second principle is that we have unlimited wants and desires. Third principle - given 1 and 2, we have to make choices.
Rupee Appreciation:
Rupee at a 9-year high against US Dollar…!! The rupee surged in late trade to its highest in more than nine years on Wednesday 3rd-Oct-07, as foreign fund flows into a surging stock market trumped suspected RBI intervention. The partially convertible rupee rose to 39.55 per dollar, its highest since April 1998. While appreciation is a fine art, knowing how to accept appreciation gracefully is an even greater art. The angst voiced at the rupee's appreciation in newspaper columns and seminars conducted by industry and exporter bodies seem to fly in the face of the time honored cultural habit of accepting appreciation gracefully. Normally, currencies appreciate when the economies are doing well and the rise in their values is a cause for celebration. An appreciating currency is the natural corollary of a booming economy with rising exports and is normally looked on favorably. The high-decibel lamentation over the rupee's appreciation, therefore, needs closer examination.
Impact on Economy:
The effect of the rupee's appreciation is not marginal as according to the World Bank, imports account for about 16 per cent of India's GDP. Importers, borrowers in foreign currency and the average Indian consumer are the unambiguous gainers from the rupee's appreciation. Finance Minister P. Chidambaram said India will review a limit on intervention bonds if asked by the central bank and analysts said the ceiling would have to rise at least by a third if the rupee's rise was to be checked. The central bank spent $38.1 billion in the first seven months of 2007 to slow the rupee's rise
According to the University of Pennsylvania's Penn World Table, 8 rupees have the same purchasing power in India as $1 has in the United States.It's natural for developing-country currencies to remain undervalued relative to purchasing-power parity for a long time, though there usually is a process of convergence.
Prosperous Impact:
Importers and borrowers in foreign currency are delighted with the rupee's appreciation to the dollar as most imports and external borrowings are denominated in dollars…!! Since Indian lenders in foreign currency normally hedge their exposures, the brunt of the negative effects of the rupee's appreciation falls on exporters, giving rise to calls for government action to depreciate the rupee. However, the effect on exporters too is not all negative. Despite rupee appreciation denting IT exports, salary levels in the industry have not declined. On the contrary, remuneration packages have scaled up by 10 to 17 percent across the spectrum with some companies reporting a bigger rise than last year.
Adverse Impact:
The Mumbai-based Tata Consultancy Services, India's No. 1 exporter of software services, said that its profit margin was shrinking because of rupee appreciation. Shares of Infosys, Wipro and Tata have fallen during the 10 percent rally in the Bombay Stock Exchange Sensitive index in the past three months. Also an extra load to employee, six working days in a week has been announced by IT companies like Wipro…!!
The rupee's rise has helped the exporters to rein in their costs and increased their competitiveness in the global market place. However, exporters, in general, have seen their profit margins erode as a result of the rupee's unexpected appreciation.
Though exporters have seen their profit margins shrink, exports on the whole do not seem to have been affected seriously the rupee's appreciation.
Rupee appreciation has caused 11,000 people employed in textiles and garment industry jobless during March-June 2007.
Sector Specific Impact:
Whole service sector had been snapped by appreciation of rupee where major client belongs to US. Indian IT sector secure top rank in that..!!
Rupee is appreciating and many Indians staying abroad and others who have less confrontation with economics see it as boon and feeling happy about it..!! When we have got two eyes better use both and visualize what boon and bane this is carrying with it…. Economics is NOT about what to think, but HOW to think......!! Its not a body of concrete truth, but an engine for the discovery of the truth." WAY of thinking in a very systematic, rational, logical manner. What is Economics about? Its about how people make choices…! First principle of economics is that we live in a world of scarcity. Second principle is that we have unlimited wants and desires. Third principle - given 1 and 2, we have to make choices.
Rupee Appreciation:
Rupee at a 9-year high against US Dollar…!! The rupee surged in late trade to its highest in more than nine years on Wednesday 3rd-Oct-07, as foreign fund flows into a surging stock market trumped suspected RBI intervention. The partially convertible rupee rose to 39.55 per dollar, its highest since April 1998. While appreciation is a fine art, knowing how to accept appreciation gracefully is an even greater art. The angst voiced at the rupee's appreciation in newspaper columns and seminars conducted by industry and exporter bodies seem to fly in the face of the time honored cultural habit of accepting appreciation gracefully. Normally, currencies appreciate when the economies are doing well and the rise in their values is a cause for celebration. An appreciating currency is the natural corollary of a booming economy with rising exports and is normally looked on favorably. The high-decibel lamentation over the rupee's appreciation, therefore, needs closer examination.
Impact on Economy:
The effect of the rupee's appreciation is not marginal as according to the World Bank, imports account for about 16 per cent of India's GDP. Importers, borrowers in foreign currency and the average Indian consumer are the unambiguous gainers from the rupee's appreciation. Finance Minister P. Chidambaram said India will review a limit on intervention bonds if asked by the central bank and analysts said the ceiling would have to rise at least by a third if the rupee's rise was to be checked. The central bank spent $38.1 billion in the first seven months of 2007 to slow the rupee's rise
According to the University of Pennsylvania's Penn World Table, 8 rupees have the same purchasing power in India as $1 has in the United States.It's natural for developing-country currencies to remain undervalued relative to purchasing-power parity for a long time, though there usually is a process of convergence.
Prosperous Impact:
Importers and borrowers in foreign currency are delighted with the rupee's appreciation to the dollar as most imports and external borrowings are denominated in dollars…!! Since Indian lenders in foreign currency normally hedge their exposures, the brunt of the negative effects of the rupee's appreciation falls on exporters, giving rise to calls for government action to depreciate the rupee. However, the effect on exporters too is not all negative. Despite rupee appreciation denting IT exports, salary levels in the industry have not declined. On the contrary, remuneration packages have scaled up by 10 to 17 percent across the spectrum with some companies reporting a bigger rise than last year.
Adverse Impact:
The Mumbai-based Tata Consultancy Services, India's No. 1 exporter of software services, said that its profit margin was shrinking because of rupee appreciation. Shares of Infosys, Wipro and Tata have fallen during the 10 percent rally in the Bombay Stock Exchange Sensitive index in the past three months. Also an extra load to employee, six working days in a week has been announced by IT companies like Wipro…!!
The rupee's rise has helped the exporters to rein in their costs and increased their competitiveness in the global market place. However, exporters, in general, have seen their profit margins erode as a result of the rupee's unexpected appreciation.
Though exporters have seen their profit margins shrink, exports on the whole do not seem to have been affected seriously the rupee's appreciation.
Rupee appreciation has caused 11,000 people employed in textiles and garment industry jobless during March-June 2007.
Sector Specific Impact:
Whole service sector had been snapped by appreciation of rupee where major client belongs to US. Indian IT sector secure top rank in that..!!
Infosys team unveiled its first quarter results; it was more than clear its margins took a beating due to rupee appreciation. Infosys mentor N.R.Narayana Murthy was not worried unduly. His solution to hardening of rupee: the industry needs to become more efficient to maintain its bottom line. Other major IT enabled services exporters may not be as confident as Narayana Murthy or Azim Premji in facing the adversity. Narayana Murthy is a visionary leader who believes that a single client should not contribute more than 25% in revenue…!! I think he should modify this statement and keep that not more than 25% revenue should come from one region…! As the companies, which have diversified their client base across the globe especially in European region are in better position.
Reasons:
The rupee's appreciation is a result of forces of:
1-Demand and supplies operating in the ForEx markets
2-The current account surplus, due to increased merchandise exports and invisibles
3-The huge FII inflows
4-Increasing reliance on low cost foreign loans
1-Demand and supplies operating in the ForEx markets
2-The current account surplus, due to increased merchandise exports and invisibles
3-The huge FII inflows
4-Increasing reliance on low cost foreign loans
Inflation Rate in India and Appreciation of Rupee:
India's Inflation Rate Unexpectedly Slowed to 3.23% for week ended 15 Sept...!! The rupee's appreciation is one of the reasons for the current LOW inflation rate. Inflation in India remains much lower than in many other developing countries. But prices are rising more than twice as fast as in China, India's chief rival for foreign investment and economic leadership among emerging markets. Prices are also increasing considerably faster than in industrialized countries.
The drop in the inflation rate may not be enough for the Reserve Bank of India to start reversing three years of interest-rate increases. Record foreign investments are flooding the economy with cash and spurring consumer demand, which may force the central bank to keep borrowing costs high.
Average annual inflation rate was 5.2 per cent during the previous year. The Wholesale Price Index (WPI) for all commodities declined by 0.1 per cent to 214.4. While some of the analysts feel that the RBI might go for marginal cut in interest rates to maintain growth momentum, some others feel that in the wake of large inflow of foreign capital and spurt in crude prices would force the central bank not to alter its present monetary policy.
Government Intervention:
What are the benefits of Govt. and RBI’s intervention? First, preventing rapid rupee appreciation reduces the shock to exporters. Second, reserves are protection against trade shocks (like high oil prices), financial shocks (like the Asian financial crisis) and political shocks (like war with Pakistan). Yet India has actually weathered, at far lower reserve levels, a tripling of oil prices between 1998 and 2003, the Asian financial crisis of 1997-99, and the Kargil war of 1999. The Asian financial crisis also proved that the right way to combat such crises was through capital controls, not large reserves.
Preventing the rupee from appreciating creates a serious moral hazard. For starters, it encourages importers not to hedge their imports. This actually increases our vulnerability. Preventing rupee appreciation only strengthens expectations that the rupee will rise soon. This induces an ever larger inflow of dollars, worsening reserve accumulation in a vicious cycle. This can lead to unsustainable and potentially destabilizing inflows.So, there is a case for greatly reducing RBI intervention in the forex market. That may mean a sharp rise of the rupee followed by volatile ups and downs. This will reduce moral hazard and complacency, reduce unwanted and unsustainable inflows, and oblige traders to hedge currency risks.
Some Interesting Read:
Check these links to know about USD position from Prof Perry’s blog. Always a strong, rational reason against the general opinion can be discovered..!
http://mjperry.blogspot.com/2007/10/value-of-dollar-in-1-year-check-forward.html
http://mjperry.blogspot.com/2007/10/weak-dollar-has-its-advantages.html
Strong persuasive opinion about Full convertibility of INR
http://www.thehindubusinessline.com/2006/03/22/stories/2006032200651000.htm
Benefit of appreciation which can be sensed by lay man in economics
http://timesofindia.indiatimes.com/Business/India_Business/Rising_rupee__the_fall_of_almighty_dollar/articleshow/2009337.cms
Japan faced the similar appreciation in Yen
http://www.iht.com/articles/2007/06/05/business/sxview06.php
Salary increase always motivates
http://www.newindpress.com/NewsItems.asp?ID=IE920071003030250&Title=Chennai&rLink=0
Frontline IT companies — weathering a turbulent quarter
http://www.thehindubusinessline.com/iw/2007/08/12/stories/2007081251080700.htm
The rupee, with centuries of history behind it, is capable of depreciating with elegance and appreciating with grace. If only we would let it…!!
Preventing the rupee from appreciating creates a serious moral hazard. For starters, it encourages importers not to hedge their imports. This actually increases our vulnerability. Preventing rupee appreciation only strengthens expectations that the rupee will rise soon. This induces an ever larger inflow of dollars, worsening reserve accumulation in a vicious cycle. This can lead to unsustainable and potentially destabilizing inflows.So, there is a case for greatly reducing RBI intervention in the forex market. That may mean a sharp rise of the rupee followed by volatile ups and downs. This will reduce moral hazard and complacency, reduce unwanted and unsustainable inflows, and oblige traders to hedge currency risks.
Some Interesting Read:
Check these links to know about USD position from Prof Perry’s blog. Always a strong, rational reason against the general opinion can be discovered..!
http://mjperry.blogspot.com/2007/10/value-of-dollar-in-1-year-check-forward.html
http://mjperry.blogspot.com/2007/10/weak-dollar-has-its-advantages.html
Strong persuasive opinion about Full convertibility of INR
http://www.thehindubusinessline.com/2006/03/22/stories/2006032200651000.htm
Benefit of appreciation which can be sensed by lay man in economics
http://timesofindia.indiatimes.com/Business/India_Business/Rising_rupee__the_fall_of_almighty_dollar/articleshow/2009337.cms
Japan faced the similar appreciation in Yen
http://www.iht.com/articles/2007/06/05/business/sxview06.php
Salary increase always motivates
http://www.newindpress.com/NewsItems.asp?ID=IE920071003030250&Title=Chennai&rLink=0
Frontline IT companies — weathering a turbulent quarter
http://www.thehindubusinessline.com/iw/2007/08/12/stories/2007081251080700.htm
The rupee, with centuries of history behind it, is capable of depreciating with elegance and appreciating with grace. If only we would let it…!!
(Sources: BusinessLine and Economics Times)
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