India at Crossroads - 2

Lets continue our discussion from last post. Before that, got some queries about DXY and where can it be seen. Here is the link.

Now, as for the Rupee level, as I said, I would like to see Rupee find its level naturally. There are few reasons for that. First of all, RBI does not have luxury of excess reserves which it can afford to splurge on supporting rupee. Our reserves are a phony figure because we run both Current Account and Fiscal Account deficit and we need those reserves as a cushion unlike China which actually have real reserves due to its huge trade surpluses with rest of the World.

INR at 56 or even 60/$ can bring some good news for Economy. At this level, even the brain-dead politicians will realize that they cannot subsidize petroleum products endlessly. They have to (had to, already 7.5 hike and 1.6 rollback has happened) pass on some burden to users. When this happens then users tend to use these products judiciously. Also the industries which are importing raw materials will feel the pinch and will want to improve efficiency to reduce this added cost. People who want to go for a foreign tour (on a budget) have a re-think and may settle for vacation in India this summer. NRIs will want to use this opportunity and send some more money to India. All in all, demand for Imports goes down, $ inflow starts to get better.

However, real advantage of falling Rupee is for Exporters. Imagine a case where I am making something at INR 60 and I want to export it. When INR/$ was 50 I would quote my price at 1.2$. I may be competitive or I may not be. Rupee depreciation gives me the liberty to quote my product at 1.0$. If I am facing the competition then I would reduce the price in direct co-relation. If I do not have competitive pressures, I would improve my margins and pass on only some part of depreciation to my customers.

Simply out, China today is the manufacturing power-house of the World not because of a strong Yuan. On the contrary, keeping Yuan artificially low as the state policy is the single biggest factor which helped China have massive reserves and trade surplus with every other nation in the World. We Indians, tend to think emotionally and feel bad when Rupee slides against $. We take pride if Rupee is stronger and start to feel as if we are already developed nation.

Thinking just little below the surface will expose how strong rupee is a bad thing for us right now. in 1990, we were forced to devalue the rupee. Now it is happening on its own. Situation in 1990 and today have a major difference which is state of the Private Sector in Economy. In 1990, our companies were all working like Government Organizations, no competitive edge, no global operations, no real profits or cash. Today our Private Sector is much more vibrant and in a better condition to exploit the weaker rupee. We can get many BPOs back from the Philippines with he help of weaker Rupee and create some jobs for the youth. These are the people who are driving the Indian Consumption story and closure of BPOs is a blow for them. There are already serious indications about even the Consumption is going down and there is a simple co-relation between more unemployed youth and less public spending. A weaker rupee can set these things right in a very little time.

Have been writing this post in bits and pieces so you may find it lacking continuity. My apologies for that but my Project deadline is in this month and I am really stretched thin in various directions. That will not stop me from writing though. In the next post, I will probably touch upon what I believe will happen and how the things will pan out for India, Markets, Gold, etc. I also have to write about the Credit Card query and I really feel bad for not doing that.

After these couple of posts and after my project is over, I plan to consolidate my blogs in one. That will simplify things for me and then we will carry on with trading posts as well as Technical Analysis tutorials. Lets hope God does not dispose what I propose. Keep your comments coming in. They push me to write more.