Indian Economy - Depreciating INR

I came across an article , providing the details about fall of INR in recent time. The illustration and explanation was excellent however outflow of FII Debt funding alone may not be the only reason towards fall in INR value. India had been a closed economy till 90's and was forced to open up the economy in early 90's due to balance of payment crisis at that point of time. In a 'open' economy the many factors contribute or triggers such fall . 

To me, the other factors which is contributes to depreciation of INR can be,

 Foreign Equity inflows (FII and  FDI) are good for open economy, not only from investment perspective it is also said generate employment. But, then at the some pint of time, there is bound to be repatriation of profit in form of dividend or other investment. So naturally there would be an outflow. No business man would like to keep the equity for ever, without appropriate returns. 

Corporate Debt: It is said debt content with major corporate has increased over the years. More importantly about 40 to 50% of debt is in foreign currency. Now with dollar appreciating, the Indian corporate have to burn more money not only in form of interest, principle but also due to depreciated INR. This would certainly increase outflow of foreign exchange in future.

Oil import: There is no respite for oil bills import expenses or rather the outgo of foreign exchange on Y-n Y basis. It has been on increase always. Just look at the number of vehicles registered in an RTO in metro’s, one could judge the increase in vehicle registered, so naturally consumption of fuel is bound to increase, unless the country has efficiently planned public transport. 

Gold Import: Amid all the efforts being made by the Government to curb gold imports, demand for the precious metal in India zoomed to a 10-year high (310 tonnes) in the three-month period ending June 30, according to the World Gold Council. Gold is very dear to Indian families and it is said to be second to China in import of precious metal. With return from Indian stock market not looking good in last few years and gold returns looking good in the last few years, the gold is also looked upon as an investment these days. However, this causes stress on foreign exchange due to import of gold. 

One may not know which factors can trigger a fall in exchange rate at any point of time in a global economy, unless there is a well planned and coordinated execution of growth oriented policies towards development of economy. Hence, is India really prepared for 'Open' Economy?

Also, at same time, fail to understand as how some of the developed countries even though have a higher deficit budget and with higher content of debt as percentage of their GDP has better currency exchange rate when compared to India?

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Petrol price reduction - May 2013

In May 2012, the petrol price was about INR 77.00 Per litre and Diesel was about INR 44.00 per litre at Chennai , a whopping difference  of about INR 30. In fact, I heard petrol car manufacturing was almost stopped due to slump in demand around same time and many were focused on buying diesel car, in spite of paying higher upfront cost of more than INR 1,00,000, even though their car usage was low.

Last year May 2012, had made some basic calculation comparing year 2008 price peak barrel price of oil, exchange rate against market petrol price and posted about the about the increased price of petrol. My observation was based on the  chart below in May 2012 (i.e INR 77 /litre) is higher or overpriced by about  INR 13 then.

A year later now, there is not much change in situation, barrel price is around USD 100 and USD exchange rate is almost same. However, the petrol price at Chennai is now dropped to INR 65 and diesel per litre is in range of INR 50, with a difference of only INR 15. This should bring some cheer to petrol car users and it could well mean, my earlier calculation on petrol (overpriced) right???!!! :-)

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Water finds it way and so do the currency

It’s a known fact, that water finds it way when there is a gradient difference between two points.
One can still store the water in dam, but for any productive work like generation of electricity or towards use in agriculture or even for industrial development one needs to release water from dam.

In a globalized economy, the currency is like water and particularly when there is a marked exchange rate difference between currencies. Almost all the developed economies have very strong currencies and these currencies had become very strong in last 2 or 3 decades. Hence, like water, strong currencies are finding its way into weaker currency country for productive work, particularly when the weaker currency country has a reasonable political stability and infrastructure. The weaker currency countries, termed as developing country naturally has a higher GDP compared to developed country.

The only difference is that water cannot be manufactured, while currency can always be printed legally by Government or a government debt ceiling increased towards retaining strong currency. Though there can be short term correction to foster economic development of developed country, in long run, the strong currency would act like water in a globalized economy.

Like water flooding low lying areas, when it finds the way. The global currency, once it find its way into weaker currency country can flood it, which lead to higher rate of inflation in the weaker or developing country.

On a lighter side, none is stronger than nature.

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Stagflation

Had seen news papers reporting stagflation of Indian economy by Moody's Analytics. First time, I was hearing the word Stagflation (off course, I am not a economist!!?!). The means, the economic growth or GDP is less or getting down, while inflation is still going strong.

 Hmm..., though not surprised, more than an year back had written a post about Indian economy 's GDP Vs Inflation compared to US and Chinese economy. In that post had mentioned that all may not be well even with higher GDP. 

 With GDP also decreasing now, reduction of interest rate could fuel inflation further. It could well be a double whammy for Indian economy.

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Oh!..Not again... Petrol price increase May 2012.

My previous post was about depreciation of INR against USD and pointed out that petroleum product prices are bound to increase if depreciation continues,
While posting, my previous post, one of the factor, which I thought would be in our favour was that, crude oil price per barrel was still hovering around 100 USD and not at its worst. At one point of time in 2008, the crude oil per barrel was around 147 USD. Hence, I thought it may take some more time before any kind of increase.

  Hmm… however was shocked and surprised that only petrol price was increased by 7.50 INR per litre. Interestingly, petrol is environmental friendly when compared to diesel.

Made an attempt to compare & compute estimated prices, by considering the international prices of barrel of crude oil in year 2008 and 2012, the actual exchange rate and inflation.

Going by my calculation, it seems like we are being over charged by about 14 Rs.

It was said the government has decentralized and do not control oil company and its prices. Hence, are we being overcharged, with profit motive?.

There could be another debate, that Indian government is looking for ways to decrease or remove the subsidy over period of time and subsidy is being reduced further now. But, then how are our neighbors like Pakistan and Srilanka are in position to provide petroleum product price at better rate compared to India and still survive !!?!!. The point to note here, is that both Pakistan and Srilankan currency (Rupee) is weeker when converted to Indian Rupee.

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Depreciating INR… Gainers & Losers

With Indian rupee depreciating, it grim picture painted out on our economy. The instability is attributed to many factors including Euro crisis. Since 2006 economies around world is in turmoil, if one country attempts to come out, it impacts directly or indirectly the other country. It started of with US mortgage crisis in 2006/07, which was followed by Lehman brothers and other financial institution collapse in 2008, then came crash of stock markets, Euro crisis which was followed by appreciation of gold. The news coming out these days is quite conflicting, on one month one would see economic recovery being projected and the following month, one would see depressing news about economy.  
 What does rupee depreciation mean to Indian economy and who could be the probable Gainers or Losers?.

The Gainers: 

Exporters, particularly who are using the resource and raw materials by paying them in INR and getting return in USD. Companies earning in USD and reporting and exchanging to INR would stand to gain 

Indian Origin people sending foreign currency to India and converting into INR and making permanent investment in India. The reason being they would be getting more INR for lesser amount of USD. A 100 USD with exchange rate of 56.5 will fetch more INR compared to 100 USD with exchange rate of 40 INR.

 The Losers: 

Importers, more particularly India Government importing large volume of oil are bound to suffer. Normally such increase in Oil cost is passed on to the customer and naturally people of India would have to burn the money more. This would eventually continue spiraling of inflation, which is already high. 

Foreign equity investors who are looking for gains might lose, if attempt to pull out money. They now have to think or hold it for some time. The reason being, assume a foreign investor had invested in company ‘X’ in India when exchange rate was INR 45.00 (1 USD) and if he had invested USD 100, would exchanged to INR 4500 and invested the same. If there is a lock in period of 3 years and due to company profits the amount becomes INR 5700 in 3 years time, which is around 10% in ROI per year. However if the Foreign equity investor attempts to repatriate the investment back, due to prevailing exchange rate of 57 INR per dollar, the FI would get only 100 USD, in spite of money being invested for 3 years. 

In short term for India, it’s good that money does not flow out of India remain within India, however, in long run if INR is volatile and continue to depreciate the foreign investor would lose interest in Indian market.

Hence naturally, there is more to lose as for as India is concerned and lets hope INR bounces back in exchange rate.

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Why rent is better deal than mortgage?.

Recently,read this article on "mortgage loan" and felt worth sharing.

 Though the article had been written with US market in mind, the points mentioned would very well be applicable for Indians as well. On top of this, Indian system is suppose to have additional drawbacks,

 Indian interest rate is almost twice when compared to US, which mean higher out go of cash towards interest component in earlier years. Another point is that, one who invest money in mortgage, would have invested all his earning and he has to keep paying the interest component for the first few years. After few years, if one is able to make saving or his income increases and decides to pay back or part pay the home loan, its going to only reduce the principal amount for which the interest component is already paid during earlier years of loan.

 Hence, the real benefit is for the mortgage company or financier.

Finally, the cost of real estate in India seems to much higher than developed economies. An article related to " India property bubble".

Is worth to think through and decide before investing. 

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