Tuesday, May 29, 2012

Rupee Fall will hit You and me

This article was originally published in Postnoon on May 25th, 2012


http://postnoon.com/2012/05/25/rupee-fall-will-hit-you-and-me/50330

I ran into my recently married cousin and his wife at a family function yesterday. I asked him, "Abhi, you were supposed to be on a honeymoon in California at this time! What are you doing here?"

Abhi: I had booked my trip with a travel agent six months back, as soon as Priya and I got engaged. The travel agent had told me that the trip would cost me a total of around Rs2,00,000/- Now he is asking me to pay him Rs2,30,000/- So I fought with him and cancelled the trip.

Nicky: Oh oh! The exchange rate has spoiled your honeymoon!

Abhi: No, it's the travel agent. He is a cheat.

Nicky: No Abhi. It's not his fault. His costs have gone up by more than 20% in the last one year. For the same facilities, same hotel, same cab, same restaurant, same entry tickets, his cost in Indian Rupees is much higher now due to the falling Rupee.

Abhi: What do you mean?

Nicky: See when you booked your trip, exchange rate was around Rs 51 per dollar. It means that for every $100, the travel agent had to shell out Rs5,100/- Now, the exchange rate is Rs56.3 per dollar. So for the same payment of $100, the travel agent needs Rs5,630/- .

Abhi: I blasted the poor agent for no fault of his. I must go back and apologize. But why is this happening? Why is the value of Rupee falling?

Nicky: There are multiple reasons. Our Government attributes it to the crisis in the Euro zone. Greece, Spain, Portugal, are all in bad shape. This is causing uncertainty in the Euro zone and hence the Euro. Investors and traders are selling the Euro and buying dollar. Increased demand for dollar is making it more valuable. So it is appreciating against most other currencies in the world.

However, Indian Rupee has been most badly affected when compared to other currencies like the Indonesian Rupiah or the Ringgit or Won. This is due to the weakening fundamentals of our own economy. Our GDP growth rate has slowed down, inflation is high and fiscal deficit is enormous. On top of that, the political will to take corrective measures is lacking. The allies need to be placated at every step, preventing any meaningful action.

Abhi: But why doesn't the RBI do something about the exchange rate? If they supply dollars in the market, the rupee should stop depreciating right? And I have heard that the Indian government has huge reserves of foreign currency.

Nicky: You are right. If dollars are supplied to the market, the rupee slide should stop. But how much can the RBI supply that is the question. We have a reasonable reserve right now. But we should not forget that our oil and gold imports are also very high, which are both paid in dollars. Also, till the confidence in the economy is not restored, foreign institutional investors will keep fleeing the country with their money. New investors will not come into the country to invest.

Abhi: The country is going through all this, and I was upset about my honeymoon!

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