Rupee volatility and its impact on Indian market

Organized by: ICSI (Nagpur Chapter) & Business StandardProf. Ranjit Goswami

Seminar on

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?

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

Rupee Bungee Jump!

Source: Surendracartoonist, Surendra, Facebook & Hindu

Historical rupee : dollar, at par in 19471950 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%.

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’

Leads to funny FB postingsEarlier, 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

& more FB postings…

Source: Facebook

Size always does not mean obesity…as in this case

No country could ever attain strong economic power status by

devaluing its currency- History says

Market, & currency volatilityYear Sensex Rs:$ Return

in INR*/$

DJIA Return Shanghai Composite

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

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

Japanese yen:$...Volatile?

Source: Wikipedia, Plaza Accord

Euro:Dollar, volatile?

Source, Wikipedia, Euro

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

"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

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?

You can’t have a ‘Wall Street’ before having main streets

- Old proverb or common sense?

Washington consensus reform vs. others, particularly Beijing

Consensus

Experience from South Korea to Taiwan to other EA economies

‘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)

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

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.

‘Inflation is always and everywhere a monetary phenomenon.’

- Milton Friedman

Please note, role of monetary policy in creating supply is limited.

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

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

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 possibility of tightening of liquidity binge that lasted more than a decade

“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

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…

Where is the money? We are running huge budget deficit too.

It’s there…

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

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.

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 ratesHigh cost borrowings low investments• Point is: negative feed back loop

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

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

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

India’s external debt…

Since 1991, both GDP & external debt sort of quadrupled

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

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

39

Please, please… do not add more cows, as in above, as

more ‘reform’

‘Thankfully, out of time. Will be happy to answer, or possibly evade

your questions…’

Thank you for your time…Ranjit.goswami@gmail.comDean (Acads), IMT Nagpur