Future of Rupee - Part I

Now that the inflation in India is tamed, the central bank in India (RBI) started back to its good old ways - buying humongous loads of dollars and increasing money supply bringing down call rates and also simultaneously increase Cash Reserve Ratio, affecting the profit margins of banks.

In the last couple of months, after I wrote the article series - "Is RBI handling inflation correctly", I had been in touch with a few financial columnists in India, working for Bloomberg, Hindu Business line and Business Standard and a few of them were very apprehensive of the rupee's effect on exports and cite their good old model - China on how to manage the inflows. However, good China had been in energizing the economy, I dont think that it is an good example for everthing. It has its price.

To put it short, if you have to manage heavy inflows - you have to screw one or more among the four crucial variables
a) Inflation
b) Export competitiveness
c) Financial health of banks
d) Interest rates and capital availability

So, if you have allow all those dollars to flow into India, unhindered, you will immediately cause rupee to appreciate (by simple demand-supply) and India's export competitiveness will be eroded as exports will be costs compared to imports. So, if the central bank buys up the dollars and prints rupee to prevent appreciation, it will cause inflation by making more money available in the system and weakening the currency. Now, to keep money supply constant and prevent inflation, the central bank has to increase interest rates and cash reserve rates (the amount banks have to keep idle and not use for loans from their deposits) affecting the availability of domestic capital and affective investment in crucial sectors. Now the Chinese model - sanitise all those dollars and not cause inflation by arm twisting the market by fixing constant prices and wages. And use banking sector to fun unproductive enterprises and load them with debt. This way the banks will take all those blow associated with maintaining the dollar low.

Each of these paths have a price. Inflation is the worst and no elaboration is needed here. If managed wrong and allowed to go on a vicious cycle, can cause the worst nightmares as seen in the hyper-inflation in Greece, Germany in the early 20th century and in Latin America in 1980's and 90's. Interest rates are among the next worst as it affects needy companies from raising adequate capital and affects crucial investment opportunities. Corporations would be unable to raise debt at favourble prices and affect economic expansion. And financial institutions are very crucial for a good market economy and making them a scape goat for increasing exports will debiliate the economy in the long run. Its like smashing the leg to give more blood to the hair. The last comes exports - whose importance varies from economy to economy.

For economies like Japan, Korea, Singapore and even Germany, the domestic population is so small and spend allergic that there is no way that they can ensure good jobs by relying on producing for local markets. They are forced to export and to export they have to have good currency support and so artificially affect exchange rate even at significant costs to economy. But, this doesn't hold good for China or India. They have 1 billion+ customers each and a good economic history that they dont theoratically need any external markets for their goods. If they can stand on their own legs by developing good local markets, the enterprises have so much of room to grow that they can forget about currency manipulation. And given their rate of expected growth and scale of operation, they cannot afford to depress currencies forever. Elephants cannot afford to jump trees and hide in burroughs and the managers of these trillion+ dollar economies better know this.

(Next part: The reasons why should the RBI allow freer flows and there is a solution, where we could avoid screwing up any of these 4 variables, to a great extent)

Back to Blogging after a long hiatus

I'm back to blogging atlast, after a 3 month sojourn. There were two many things that were happening that I hardly got time to sit down and write something. I got to write a couple of drafts, but later discarded them. I wish I could write a few elaborate articles, but the time required to put long good article in place (including the background reading) was demanding and I couldn't do enough allocation.

Last 3 months in Brief:
>> My parents and grandfather came to visit me and it was great time May - July. They were with me for my graduation ceremony, my dad's birthday, my birthday, my parent's wedding day and its great to be with the family. It was the longest vacation ever for my father and its the longest time, I spent with them since my school days.

>> I had the longest and best drives in the month of May. I drove for 2300 miles during my trip to Calgary, Canada visiting Banff and Jasper parks on the way. The one week trip through some of the world's most beautiful glaciers that are source for the biggest chunk of world's freshwater (most of water flowing through Missouri, Missippi, Niagara and other great rivers & lakes of North America draw its source near here). On the second leg, I flew to New York and had another 2500 miles drive around Toronto, Niagara, Pittsburgh, NYC, Baltimore, Washington DC...showing some of the iconic American tourism destinations to my folks. The 5000 mile+ drives on solo in 3 weeks had taken most of my energy for that period. I'll write on these trips, after a while.

>> My Ski accident in March had screwed the ligaments on both of my knees and on May 1, I realized that I had to get surgeries on both legs to repair back. I had one of the surgeries on June 11 that fixed 2 of my ligaments and I might have one more later this month to get everything completely fixed. But, the recovery for the ligament repair is long and so it will be a year, before I could take much of strenous physical activity (like Skiing or Skating :)). This was my first major surgery and the experience with General Anesthesia was overall very disturbing. I couldn't remember anything of that 2 hours and to think back of that overall blank state, I could think of death as the only closest thing. And the first week after the surgery was horrible. It was paining, itching and totally disturbing :( to have a knee locked out. And walking with braces and crutches was pretty discomforting to say the least.

>>I got a traffic ticket in May that put my overall driving under great stress. I just spiked to 90+ on a 70mph zone, as I was overall very tired after a week of driving and there stood a cop. Normally, I learnt to watch for a cop so that I could drop from 120mph to 70+ in no time, but this time tiredness and darkness took over. I was given a speeding ticket, but since I was perfectly alert and stopped immediately after the lights were put on, I was given no other citation (normally 23+ the limit can cause multiple tickets). After the ticket, I got so careful that I dont drive above the speed limits and life is a hell now. I couldn;t chase any powerful cars and I had to constantly move to right lanes to gave more faster cars a room in left lanes. Even stupid, sluggish and humongous trucks, tail-gate me. The moral: If you are a Lion you have the luxury to sit over your prey, but if you are as innocent as the lamb you are a sitting duck for others to prey on you.

Luckily, my ticket is dismissed by having an expert lawyer on my side, but its doubtful I would ever go to the 120-130mph range, that i occassionaly try on deserted highways with my V-8 machine. And with high gas prices and low fuel efficiency at high speeds due to wind resistance, I'm now happy at 70-75 mph range.

Overall, life has never been so tough and 3 of the passions that I had so far - Movies, Skiing and Driving all took a backseat. I also stopped communicating with people - no phone calls, emails, orkut scraps, blogging... Now, I'm very close to come back with my normal life. Let's see how the next few months unfold.

In the meantime, I'm getting back to touch with the economics literature and I'll be back to serious blogging there.