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Luis Miranda

Saving the Rupee

I want to join the hordes of ‘experts’ who are commenting on the value of the rupee, what the RBI should do, etc. What right do I have to write about this? Many… The main one being that my daughter is off to the US to study next year and her college bill is going up very fast! Maybe because I spent 11 years of my life in the dealing rooms of Citibank, HSBC and HDFC Bank advising clients on how to hedge against a falling rupee. And I was wrong quite often. So I guess I am eminently qualified to also write about the rupee.

First of all, I haven’t met anyone who knew what the correct price of the rupee should be against the US dollar or any other currency. Anyone who can claim to know that is God. And yes, I believe in God. But I haven’t met God in any dealing rooms or economist’s adda or in a press room or TV studio. So if someone says that the rupee should be at 70 to a dollar she or he is talking nonsense. Of course if everyone says that the rupee should be at 70, then the rupee will indeed head towards 70. But that doesn’t mean that the correct exchange rate should be 70… or 50.

The simple fact is that people buy dollars and sell rupees if they either (a) need dollars to make a payment, (b) expect the rupee to fall further and want to lock into a rate for a future payment, (c) want to anyway lock into a rate for a future payment to remove any exchange rate uncertainty or (d) want to punt on the value of the rupee through a trading position.

Speculators punt on the value of the rupee. And everyone loves to trash speculators. They are treated the way people treat rats. I detest rats. I find them creepy, and many years ago I nearly jumped off my terrace when a tiny rat showed up. A few years before that one of my Sunday School students gifted me a white mouse knowing that I dread these creatures. So most people want to get rid of rats. But rats have an important role to play in the food chain. If we got rid of all the rats we will have other problems… other pests will proliferate, garbage will increase, etc. So while we shouldn’t eliminate all rats we should control them. We have seen how difficult it is to control the rat population and the areas in which they scavenge.

The same with speculators–they play a very important role in the FX markets by supplying the ‘noise’ element and lubricating the system. If we remove speculators we will have violent swings in the value of the rupee because some ‘wise’ person would be deciding what the value of the rupee should be in an illiquid market; and as I have said earlier, that person cannot play God.

But I have got lost in my ramblings… how does one save the rupee? As long as people have little confidence in the stability of our economy they will have little faith in the rupee. The RBI can do little to reverse that sentiment and it is foolish to expect the RBI to have a magic potion. So the solutions are simple: Bring back confidence in the economy by reversing the reversals in the reforms process (a great article by Ajay Shah recently), monetise the gold held by the Tirupati Trust (that was Jamal Mecklai’s suggestion), stop the barrage of negative articles and talk shows in the media by ignorant people (a recommendation of my dad), focus on the good stuff happening around us (eg the growth in the rural economy), complete stalled infrastructure projects to show that the government is committed to action (as opposed to announcing new projects which will find poor response), cut down on socialist schemes which increase the fiscal deficit, get a Pied Piper to lead all politicians off a cliff (that was my idea, related to my aversion to rats)… Okay, maybe all of these measures are not possible and I am painting too rosy and simplistic a scenario. But the current government got us into this corner with great ease and they can get us out as easily.

We are a nation of emotional people who swing widely from euphoria to despair very easily. I recently attended a talk on the Indian economy in Singapore where our sentiment towards the Indian economy was compared to our sentiment towards the Indian cricket team. In May 2011 Dhoni’s house was stoned. In May 2013 he was condemned for being too close to Srinivasan. And now he is worshipped as India’s greatest cricket captain. This morning a friend reminded me… oil was at $28 in 2003. If someone told us that it would be around $100 ten years later, we would have fled India and moved to an oil exporting country.

Well, many of us stayed on and India is still going strong. So let the rupee fall to where the market wants it to be. All I know is that this is a great time for foreign capital to be investing in India. It is a lot like 2003… Over the five-year period from 2003, oil prices went up 3 times, the stock market in India went up 6 times and the rupee appreciated against the dollar by 14 percent.

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True Luis but it is the easy money that was coming into the country (whether QE or not)that encourages our profligacy. If you run twin deficits something has to give. Eventually we have to fix the CAD. Simply financing it by overseas investment is not a solution.
Thanks for your comments. But investments flew to India way before QE. Yes, QE did help flows in recent times. And yes, comments like "no choice but to cometo India" are stupid and wrong. And yes, retrospective taxation (after losing the case in the Sureme Court) was wrong. I guess we are seeing sensible steps being taken now. The challenge is to focus on completion of stuck projects so that capacity gets finally created.
Look - when there was quantitative easing, large slugs of money were sloshing around looking for a home. India was the flavor of the time and received chunks of foreign investment. The government was quick to jump on the band wagon and take credit for bringing investment into the country. Rather than the foreign investment funding our current account deficit, the opposite happened - our CAD rose to meet the extra financing!! From USD 8bn to USD 90bn! Then of course we had Pranab Mukherjee who arrogantly postulated that "foreign investors have no choice but to come to India". This was followed by Vodafone, retrospective taxation, and GAAR. Guess what? He was wrong. Investors voted with their feet and the flow of investment turned. Now we need to tighten our collective belts and work towards bringing down the CAD. In the short run, we need to finance the CAD sensibly (not hot money). I suppose that's where the RBI / Government can help by instilling confidence - talking up the rupee and opening up the economy.
Thanks for your comments. But investments flew to India way before QE. Yes, QE did help flows in recent times. And yes, comments like "no choice but to cometo India" are stupid and wrong. And yes, retrospective taxation (after losing the case in the Sureme Court) was wrong. I guess we are seeing sensible steps being taken now. The challenge is to focus on completion of stuck projects so that capacity gets finally created.
Good ideas and well said. May be time to start taking pride in "Made in India " to help recover rupee, our industry and our net worth.
I hope so too!
I think the mnc and govt cmpnies shud ask for their payments in rupee. . .this wil make huge dollar rupee conversion. . .and wil increse the dollar fund. . .nd make rupee in demand. . .nd rise it
Maulik, it is not that easy for people to change the currency of payment especially if the currency is under attack. And when the rupee begins to appreciate, the sentiment changes. For the moment, domestic manufacturers and exporters are happy.
balasubramanian ( bala)
as usual Luis calls the bluff in his style- I agree with Luis- we as Indians are uncomfortable with market dynamics although we pretend to like market reforms. unfortunately even RBI and Govt are attempting to respond to calls to set the "rate" "right"- classic case of medical practitioner treating symptoms rather than the disease - may be they know but they are just playing to the gallery to soothe the emotions in the hope that markets will take note and act. But international funds managers also love to choose a country for a while and pamper it to ditch later, It was Latin america in 80's, mexico in 94-95, SE Asia in 97, Russia in Y2 K, Argentina in 2001, US in 2008, Greece and Ireland in 2009 and India
Bala, hopefully the romance with India is not short-lived ... too many people in this country to ignore. A few years back the former head of IKEA India told me that the owner was very frustrated with India and said they will never look at India again. Yet, when the FDI Retail rules changed, they started the process again ... and were frustrated again.
Luis, good article. I am surprised that you didnt touch on the fact that while India has huge $ reserves in billions and oil importing companies are govt owned (or are they divested with the govt being a shareholder?). Is this why the govt didnt feel compelled to step in and stop the free-fall. One of the other things is the state of the country itself, high inflation (and still climbing), an appetite for debt never seen before in the past 50 years and maybe, just maybe, the socialist policies without a plan for where the money comes from (a spendthrifty govt), a looming real-estate bubble (hitherto no one is talking about, a good plug for housingbubble.blogspot.com)...consumption fueled by debt or MANY multiples of one's annual salary is a recipe for disaster (if the USA is any example)...I am somewhat thumbs down on India. The rest, you already have pointed out.
Kalidasa, Jerry Rao wrote an article in one of the papers recently that the Indian government started exchange controls many years back because they feared that Indians were importing unnecessary luxury goods. This sounds like deja vu. Interestingly my father sent me an email that said that the rupee always fell in the year preceding the elections, except in the previius elect ions.

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Good article Luis. I agree the present Govt can get us out easily!!!
Thanks ... but is easier for me to write that on a blog! Politics can be complicated, if we want it to be.
Interesting article - I agree with Indians being emotional and perhaps it does seep into market activity, maybe even other business decisions. The comments to your article provided interesting perspectives too - thanks Luis.
Thanks, Mansi. Today's papers have negative comments from a lot of people overseas who were positive on India till recently ... And the ineffective policies and inept government has remained the same during this period. Sentiment is a big driver.
Very well written LM. Agree with you
Well written and thoughtful piece of writing. I think two things triggered this fall. One, the trust deficit in this govt which led to withdrawl of debt FII funds. The other stepped up import of gold. This led to increased demand of dollars and depreciation of dollars. The trade deficit of over ten years caused outflow of US $ 929 billion. India has the third largest coal reserves but we import coal for dubious reasons. Workers remit FX to India by sweating abroad and we spend that FX on import of luxury cars and clothing. This fall in rupee value should reduce imports and increase exports but it will take time. Till then we all suffer. I have two grand daughters studying abroad and I should know.
The CAD aggravated the problem - the 4 drivers being oil, gold, coal and iron ore (exports were shut down). But the indecision of the government and the regulatory uncertainty coupled with the huge amount of stuck projects across the puntry are the main drivers. Unfortunately, a lower CAD may notwin elections; the food security bill may instead.
Thanks for responding to my comment. I share your views. However, believe that FSB will not win elections for UPA. They are past " Good for use" date.
Luis, solid piece and interesting metaphors! In particular, powerful is thy thought that if everyone "says it should be 70, then it will get to 70!" - that IS the way markets work, run as they are by largely emotional/not-always-rational humans. So since things that are written and said DO play a role in how results play out, why do we NOT speak more of India's export advantage as a result of our rupee doing its latest thing? I mean, this would actually solve pretty much all our problems, no? Upon checking trends, it appears that our exports unfortunately either stayed the same or actually DECLINED YoY the last few months (thank God July-13 seems to buck this trend positively...good sign?). Is it our government? Is it our businesses? Or is it just that we are so focused on the negatives of this currency jig that we're missing the larger, more positive picture which could be our salvation? MEDIA, are you listening???? I mean, which country has the market, dynamic, entrepreneurial zeal and exuberation (yes, the man on the street still largely has it) that we do?
Karl, I had an interesting discussion yesterday over lunch about the role of the media. The media say that they cover stuff that people want to read or see. And I don't think so ... people want to read and see good news also ... I don't watch shows and news on TV because it is ridiculously silly.
Loved the article. As a non economist academically speaking, in an largely economists world this helps a lot, as do your other blogs :).
Sonali, thanks. I write in simple language because that's all I can understand myself!
Very Good article Luis. I have know Luis from his days in HSBC he was was always a very sensible man and a good person to listen to. Compare to Euro where economies are boxed in and without flexibility,YOU HAVE A FLEXIBLE economy and exchange rate that can take short term volatility.DONT CHANGE THAT.Dont worry about the speculators.they come and go they die in the end.
Chris, coming from you that means a lot. For the benefit of others, Chris Pavlou was one of the first big time FX traders in London and many years back a movie was made about a day in his life. Besides being a legendary FX dealer, he was also a great human being and his team at HSBC loved him.
Luis, excellect article. Thank you!,
Thanks, Payal.
Nice Article.... But I don't understand why we say Indian rupee is going week.... Indian Economy is still the same as it was a year ago... Its the US dollar that's going strong because of the good economic data. Remember Dollar is considered as the safe heaven for investors, so if US is going strong then Investors will move their money from everywhere and put it in US. Apart from the speculators, bigger role is played by the fundamentals of any country.
How can the US$ qualify to be the world’s reserve currency when USA may well be the biggest debtor to the world. Why are we giving so much importance to the US$? Is USA the largest debtor to the world ? If USA Federal Debt is about US$16,000,000,000,000 approx (16 trillion) and if it does not include state and local debt, and it does not include liabilities of programs like Social Security and Medicare; and if the current population of USA if estimated at 300 million – the per person debt is about US$53,000 owed to the world. That is a debt of about Rs 36 lakhs per person owed to the world. Yet, we are allowing the US$ to appreciate? I dont understand the rationale behind US$ appreciation!
Vickram... Thank you for the facts about the Federal Debt. I don't know why their currency is considered to be stronger (may be because of the stability in the currency) or why USD is considered as the safest currency or why most of the trade is done is USD across the globe or why US Fed remarks of tapering down the Quantitative easing is affecting every Asian currency. But what I know is US is much more stronger than India in terms of GDP, development, infrastructure. India is having huge CAD and their Debt is increasing very rapidly. Every day we hear about a new scam by the government officials. The policies by Indian government is putting the pressure on the rupee. Even after so high debt why was the food bill passed. ?? Whenever there is high inflation or the prices of the fuel is increased, government has the justification about the rising debt and weak economy but what about the debt now. Is it possible for the government to reduce the debt with the help of the vote bank???
USA has given the world many shocks – the technology stock bubble that cost investors billions and billions of dollars in losses; the real estate bubble; the collapse of big banks like Lehman Brothers, Bear Stearns and many other such shocks. Now, what other surprise is round the corner? A stock market crash? A bond market crash? These have the potential to wreak havoc throughout the world economy and it could wipe-out any portfolio. We could see the markets crash and turn into a crisis situation. We could also see inflation as never seen before, in this generation. The retirement dreams could become nightmares. But every crisis brings an opportunity. We all want to protect ourselves and our family from any such crisis. Everybody knows the USA is heavily in debt to China. USA could very well be the largest debtor in the history of the world. For years, countries like China and Japan earned Dollars from USA and invested them back in USA into U.S. treasury bonds. Though, over the years, the value of their holdings would have come down considerably. So, as wise as the Chinese are, they must be taking drastic measures to protect their wealth. They must be building up their gold reserves to launch a Chinese currency backed by gold. Would this mean bringing back the gold standard which USA left?
Reputational risk of the nation is at stake. Imagine the Indian Rupee as one the worst performing currencies of the world. The weakened Rupee has increased the cost of oil, hence cost of transportation and hence cost of goods leading to high inflation. Inflation always leads to a difficult life, be it for the rich, poor, middle-class. These are changing depressive times. Curb your expenses. Reduce consumption. Well, then there’s another problem – less consumption will hurt manufacturing and service sector of our economy. Are we getting into a viscous cycle?
Don't worry about our currency being the worst performer currently. This is reflective of a lot of short term measures across the world which have brought to light the more serious long term causes in India - an inept government with poor economic policies. Markets invariably overreact and we will see a correction sometime - I wish I knew when!
With the Rupee being kicked back and forth like a soccer ball, its reputation in tatters, and value sliding steeply against all major world currencies, it might help us feel better about ourselves to know that we’re not the worst currency in the world. Our sincere thanks to countries like Zimbabwe, Somalia, Turkmenistan, Vietnam – our Rupee in comparison is at a respectable level.
Shital Kakkar Mehra
Enjoyed reading your article and agree with you.
Enjoyed reading your article and since I do not understand Economics and hate rats I agree that India has a great future. It is the sentiments that need to change and we have always found our way despite our Politicians. At this moment we do need change and a dynamic positive leader to bring some cheer. Your blog was Positive and just what we need.
Thanks Bharat!
That's my point Luis.. The FIIs were all praise for India because of the burgeoning middle class... And that has constantly come undone... Right now india is an attractive low end entry level market- because of the sheer numbers...every looks at India but gets disappointed... And it's just due to lack of governance otherwise India has the talent and potential to grow more than china.. I speak from experience of having worked for almost 6 years in china and with the Chinese...
yes, poor governance, or indeed the lack of it here, is a big problem ... If accountability is improved we will see a sea change in growth and attitude. That's why the government should fix the 'easy' problems, like facilitating the completion of stalled infrastructure projects.
Its zero sum game. Somebody wins and somebody loses. Rupee value is not lost,its simply transferred from one perception to another, like magic.The illusion has become real And more real it becomes,the more desperate they want it. Capitalism at its Finest - 1987 wall street film . for more visit muruhaa.com
Dear Vicky, unfortunately it is not a zero sum game when you look at certain sub-sectors ...
Vaibhav Sirsikar
Would like to suggest one more measure - is it not true that billions upon billions of rupees are tied up in litigation in our pathetic judicial system. Why are so many scared to highlight this fact? PS: Amused at the tendency of some readers of this blog like Mr Indian to communalize innocuous comments even in a neutral forum like this!
Dear Sirsikar, the money locked up in litigations is a very serious issue and the government is biggest litigator because it also helps protect the government employee. A few organisations and the government are trying to address this issue, with various levels of limited success.
I agree with the optimistic outlook of the author and his comments that we are an emotional nation. Empathize with most of the recommendations - Not too sure however about cutting down on the "socialist" schemes - we are on terra firma as long as we do not sacrifice the welfare of our underprivileged at the altar of commercialism. We are also specialists at bemoaning temporary (and cyclical?) economic setbacks but fail to appreciate the huge leaps taken by the country in myriad fields. And why do we not celebrate the cementing and growth of our democratic, secular and inclusive values - is it because these are not measurable like the economy? I think many fail to appreciate the progress we have made despite our mind bogling diversity and challenges. Lastly, is it not true that every time we get a knock like this, we rise stronger?
Chris, that is true. We cannot grow as a country unless we have inclusive growth. But inclusive growth won't happen if money is siphoned through inefficient distribution schemes. Hence schemes that involve money transfers with the Aadhar card will help make subsidies more effective and cut down on corruption and leakages - and that is the main reason why entrenched people will work hard to block that happening.
I agree with only a part of what you say... The part where you say that india will have some amount of growth as 70 percent of India's population is still rural.. And to that extent there is a bit of decoupling.. However India's growth has never been about this 70 percent.. It's been about the expanding middle class... The fact is india has been caught with its pants down and the fall in the rupee is a result and a manifestation of a deeper rot.. Fact is india s not seen as as attractive 'break-out' nation..fact is in the past 4 years when US was in a state of depression and wages were rising in Chna, t should have been india taking advantage and not indonesia, philippines and thailand's of the world! I think your article is trying to paper over key facts... This is NOT about the sentiment in India but the way the world feels about India- a highly complicated, slow moving underachiever! The fact is FIIs and corporations have choices! If you're not interested in FIIs investing, fair enough! But the policies don't even favor indian companies! Only the politician makes money!
Dear Pillutla, the world has short memories. Just a couple of years back the same Indian and foreign investors were all praise for India. And just watch out ... in another couple of years they will be singing praises about India. Just take a look at the covers on India of The Economist over the past few years - they swing with the mood. The problem is that all good news is discounted today with everyone focussing on the bad. In the recent past all bad news was discounted as everyone focussed on the good news. Remember that a lot of people thought that India would fold up if oil crossed 60. I am not saying that all is well; we are in tough times with an incompetent government in Delhi. But there is a silent revolution taking place in rural India and that will be picked up soon.
Worth reading & understanding as usaually we react from euphoria to despair in no time being sentimental by and large. Currectly said as it seems to be the 2003 situation like and let the market forces decide where the rupee apparently should be.
Dear Khan, precisely ... let's see what happens.
Can we also sell/lease/auction hundreds of acres of land hoarded by churches/wakf boards in City Centers. So that it will free space in centres of city & may be crash RE thereyby helping economy!11
Dear Indian, I have no comment. See Sirsikar's comment.
The 1st step should be for the Government to take a bold stand - peg the Rupee to the US Dollar. When it pegs it, the speculators will unwind their position and Rupee will stabilize. In turn the inflation will stabilize. The country's finances will stabilize. The confidence of investors will be restored. The 2nd step should be to reduce reliance on the US Dollar and start trading with countries in their respective currencies. For instance deal in Singapore Dollars when importing from or exporting to Singapore; deal in Yen when importing from and exporting to Japan; deal in Rupees when importing from and exporting to Iran. Reduce dependence on the US Dollar. Reject the US Dollar as the world's reserve currency. Our Government can do anything and many things to halt the slide of the Rupee, if they want to it desperately enough and are willing to pay the price of the short term consequences.
Dear Jaitha, I am not an economist and hence can't comment on the benefits of a pegged rate. But in an election year, options are limited.
currency when it may well be the biggest debtor to the world. Why are we giving so much importance to the US Dollar? Is USA the largest debtor to the world ? If USA Federal Debt is about US$16,000,000,000,000 approx (16 trillion) and if it does not include state and local debt, and it does not include liabilities of entitlement programs like Social Security and Medicare; and if the current population of USA if estimated at 300 million – the per person debt is about US$53,000 owed to the world. That is a debt of about Rs 36 lakhs per person owed to the world. Yet, we are allowing the US Dollar to appreciate? I cannot understand this economics of the Rupee’s depreciation against the US Dollar! Can you?
An important question that comes to my mind is how can the US Dollar qualify to be the world’s reserve currency when it may well be the biggest debtor to the world. Why are we giving so much importance to the US Dollar? Is USA the largest debtor to the world ? If USA Federal Debt is about US$16,000,000,000,000 approx (16 trillion) and if it does not include state and local debt, and it does not include liabilities of entitlement programs like Social Security and Medicare; and if the current population of USA if estimated at 300 million – the per person debt is about US$53,000 owed to the world. That is a debt of about Rs 36 lakhs per person owed to the world. Yet, we are allowing the US Dollar to appreciate?
guess if the country is carrying on inspite of hundred crore rupee scam a day-making breaking news like nothing-India should'nt worry-As long as our Banks stay strong ,people save first spend later(unlike the Americans which is otherwise),India will grow-albeit slowly,but surely!!
Vickram, the answer is complex. Every $ of american debt is *guaranteed* by the US government. USA borrows heavily both for consumption and investment (roads, cities, bridges, etc.). America imports MANY times MORE than India given it has 1/4th population of India. Economies of scale work in favor of USA, i guess. The $53000 you talk about most certainly can be attributed to every individual with a social security number in the United States. Meaning, all the progress and investment comes through in the debt...also, if it was necessary someday, america can potentially cut up portions of this land (where huge investments have gone in since the past 100 years) and sell it to its debtors. Hypotheiically, China holding a big chunk of US Debt shall own a couple of states (i.e. with a wild and vivid imagination, it is possible). The other thing is, US is quick to move (while it took years to deny the housing bubble existed, they moved prety fast with the liquidity infusions in 2008, TARP/TALF and QE 1 2 3...) I wonder if this is why governance becomes important.
 
 
Luis Miranda
Luis Miranda started investing in India's infrastructure before it became fashionable. He started IDFC Private Equity and was earlier a part of the start-up team of HDFC Bank.
Luis has invested in and has been on the boards of companies like GMR Infrastructure, Delhi International Airport, Gujarat Pipavav Port, Gujarat State Petronet, L&T Infrastructure and Manipal Global Education.
Today he is involved with various non-profits like Centre for Civil Society, SNEHA, Human Rights Watch, Gateway House and Samhita Social Ventures. Luis graduated with an MBA from Chicago Booth.
 
 
 
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September 19, 2013 17:21 pm by Anil Pathak
Commented on Saving the Rupee
True Luis but it is the easy money that was coming into the country (whether QE or not)that encourages our profligacy. If you run twin deficits something has to give. Eventually we have to fix the CAD. Simply financing it by overseas investment is not a solution.
September 19, 2013 07:37 am by Luis
Commented on Saving the Rupee
Thanks for your comments. But investments flew to India way before QE. Yes, QE did help flows in recent times. And yes, comments like "no choice but to cometo India" are stupid and wrong. And yes, retrospective taxation (after losing the case in the Sureme Court) was wrong. I guess we are seeing sen...
September 19, 2013 07:35 am by Luis
Commented on Saving the Rupee
I hope so too!
September 19, 2013 07:34 am by Luis
Commented on Saving the Rupee
Thanks for your comments. But investments flew to India way before QE. Yes, QE did help flows in recent times. And yes, comments like "no choice but to cometo India" are stupid and wrong. And yes, retrospective taxation (after losing the case in the Sureme Court) was wrong. I guess we are seeing sen...
September 18, 2013 10:58 am by Anil Pathak
Commented on Saving the Rupee
Look - when there was quantitative easing, large slugs of money were sloshing around looking for a home. India was the flavor of the time and received chunks of foreign investment. The government was quick to jump on the band wagon and take credit for bringing investment into the country. Rather tha...