Report My Signal- Professional Matters

                       DOLLAR AND THE RUPEE

 

Gist of the Talk delivered by Shri Ratnakar Deole, Ex-Chief General Manager, Reserve Bank of India at the Meeting held on 4 September 2013                                      

 

At the outset let me thank the organizers for inviting me this evening amongst you all to share my  thoughts on the current burning topic of  Rupee depreciating against US Dollar

 

This is a very complex subject and cannot be handled in such a short time.

 

But for the benefit of Non-Finance and Non-Bank people I will try to make it as simple as possible. I will take care to ensure that I don’t spoil your beautiful evening ahead. Let me begin by sharing a which is in circulation on Internet 

2004  MMS – Dollar was equal to Rahul  ‘s Age   ---------------------------------------------------------------------------

 

For  this brief  session, I have structured my Talk to cover 4 important Questions which I think must be agitating your mind .

 

1       Why Dollar is so very important to everybody in the World ?

2       Why Rupee is depreciating against dollar ?

3       Who would benefit from Rupee depreciation  ?  and 

4       Who would be most affected by this Rupee Depreciation  ?

 

To answer the first Question why there is so much  craze for  Dollar I will have to tell you little bit  about the American Economy

 

       1)  USA is 3 times bigger than India and the population is only 1/3 One-Third  of   India  98 Lac Sq K.M.  – Less than 32 Crore P—India 33 lac Sq KM.—121   Crore  people

 

2)    USA is a Capitalist Mixed Economy with abundant natural Resources,  excellent Infrastructure with highest productivity

 

3)    The GDP of USA is about 16.62  Trillion Dollars constituting almost 25 % of the World GDP.

 

4)    USA is the Biggest Exporter in the World –USA is the largest Importer .Its Major 5 Trading Partners are –China, Japan, Canada, Germany & Mexico

 

5)    There is a  huge amount US Dollars in ciculation on our planet.

 

6)    2 / 3 rd. of World’s Currency Reserves are held in US Dollars 

 

7)    Many countries use US Dollar as their currency

 

8)    60  to 70 % of the world’s International Trade is done in US Dollars

 

It is for this reason that there is so much attraction or craze for Dollar all over  the world.

 

9)    USA is the third largest producer of Oil in the world and also it is the largest Importer of Oil.

10)    USA is the largest consumer of oil. 91 % of US population use their own  private transport .  Only 9 % of its population use  public transport. Per capita  consumption of oil and Gas is 7.8 Tons per year.

                                                  

11)                        USA is importing huge petroleum and using it for making Power. 40 % of its energy is produced from petroleum.23 % from Coal, 23 % from Nuclear and remaining is Hydro power.

 

12)                       USA is the largest producer Corn,  Soyabeen  and other pulses and oilseeds which all countries in the world are importing..

 

13)                       USA has been a leader in scientific research and technological innovations since 19 the Century.74 % of funding for Research comes from Private Sector. Some Examples :-

i)                   In 1876 –Alexander Graham Bell got his first patent for telephone,

ii)                Thomas Edisson developed first electric bulb

iii)              Henry Ford and Ranson Olds developed first Car assembly line

iv)              Wright Brothers developed first Aeroplane

v)                Apple, IBM Computers and Microsoft refined and popularized Computers all over the world.

vi)              USA first developed first APRANET for military use and now ii has become  INTERNET.

vii)           Many Eropean Scientisits like Albert Eienstine , Emerico, John Neumann and many others migrated to USA

viii)         Manhattan Project developed Nuclear weapons and made a beginning of Atomic Age and Space Age.

ix)              USA ‘s Military spending per year is 800 Billon Dollars i.e.41 % of total Global military spending or equal to total of 14 largest Nations. It is nearly 4.7 % of total GDP

 

I think this much is enough to appreciate  WHY all countries in the world acknowledge   USA as a Super Economic Power and Super Military Power and that is why Dollar is the most powerful currency in the world.

 

CRISIS of 2007—American Economy took a DOWNTURN following Sub-Prime Mortgage  Crisis and consequent losses suffered by Mutual Funds, Pension Funds , Provident Funds  leading to failure of big big banks.

 

This crisis in Real Estate  was  specific to USA  and  normally it should have confined to only USA . But the whole world was rocked.. This led to loss of jobs and several people had to leave USA and go back to their own countries. This slow-down in US economy  affected the whole world.

 

US Govt. extended financial packages to banks and helped them to revive..

 

Last 6 months there are reports that the US Economy is improving and the Unemloyment Rate which had crossed 13 % has come down to 7 %.

This is an  indication that US Economy is on Recovery Path

And that is Why US Dollar is appreciating

 

Now let us Rupee –Dollar Relation

 

1)    On 15 August 1947  The Exchange Rate of Dollar to Rupee was 1for 1 i.e.One Dollar equal to one Rupee.

 

2)     When India got Independence There was not a Single Dollar or Single Pound External Debt on India. But today India has External Debt  of 376 Billion US Dollars on its head. That amount is roughly about Rs.23 Lac Crores.

 

3)    From 1951 when India embarked upon its First Five Plan India started borrowing from World Bank,IMF and USA

4)    Indian Govt. devalued Indian Rupee as per their conditions and the trend continued.                                                     

5)    War of 1962 with China and war of 1965 with Pakistan forced India to buy war materials like fighter planes, Tanks and other weapons etc. from USA and at that time Dollar was Rs.7.54 rs.

 

6)    By 1970 US Dollar became stronger against all currencies due to alround  economic growth in USA and Indian Rupee depreciated from Rs.7.54 per Dollar to Rs.12.36 per Dollar and then to Rs.17.50 per Dollar

7)    War of 1971 with Pakistan and creation of Bangle Desh affected India’s economy

8)    Then there is a story of 1990-1991 Forex crisis faced by India. During that year India’s Forex Reserves depleted to such a low level that it was just enough  to meet only  3 week’s Imports and India was at a point of Default.

9)    To meet this unprecedented crisis India had to borrow from IMF by pledging 67 Tons of Physical Gold to get a line of Credit .

10)                       IMF put lot of conditions for the Loan like economic Reforms –Then came policies of Liberalization, Privatization, Globalization.

 

Now why Indian Rupee is Depreciating   ?

 

This is purely arithmetic of Demand and Supply. India’s Demand for Dollar is much more than Supply of Dollar

a)     Our Imports are increasing and Exports are not increasing but rather decreasing and there is a Current Account Deficit.

b)    CAD –Current Account Deficit represents difference between India’s Import of Goods and Services and its Export of goods and services plus the Remittances by NRI

c)     India does not earn enough Forex to pay for its Imports

d)    Uptill now we were able to manage the difference by incoming foreign direct investments  from FIIs.

e)     Till July Our Imports were to the tune of 550 billion Dollars and Exports were to the tune of about 309 Bn.Dollars

f)      To meet this Gap we have to either Reduce our Imports or increase our Exports

g)     Our Imports are large because of our large  population and so large requirements

h)    Exports are not increasing because of several factors like low level of production due to various factors like shortage of power, gas,coal, water and other infrastructure, delay in clearances and lack of supportive policies by  the govt or so called Policy paralysis.

i)       F I Is are withdrawing their investments to avoid further losses and New Investments are not coming because of fear of  political instability, message of Retrospective Taxation and lack of supportive policies.

j)        

What are our Imports ? Let us look at what we import .

        

OIL             Nearly 75 to 80 % of our imports is Oil ( Brent Crude ),

a)     International prices of oil is continuously on rise

b)    Now again with the fear of  war in Syria Prices may further go up.

c)     Every one Rupee depreciation against Dollar India’s Oil bill goes up by Rs 8000 Crores. During last One month Rupee depreciated by Rs.10 say  from 58 to 68 That means our oil bill has increased by 80000 crores.

d)    Our local demand for oil is Never ending. New new cars are entering market everyday .There are cars and cars every where around but no Roads. Reason could be  lack of cheap and efficient Public Transport . There is no sign that this position will  improve in the near future. That is why people  prefer to have their own vehicle. Therefore, demand for oil is Never ending.        

GOLD

a)     Second most important item of Import is Gold.

 

b)    India is not  producing even  ONE GRAM of Gold but imported  1072 Tons of Gold last year. We are  the largest importer of Gold in the world by paying Dollars

 

c)     In 1999 the value of gold imported was Rs 17991  Crores and in 2012  we have imported Gold worth Rs.2,69, 563 Crores.

 

d)    Govt. stock of Gold is about 360 Metric Tons. Private holding

                   of Gold in India is estimated to be around 35 k to 40 k MT  

 

e)     Gold held by Padmanabha temple in Kerala is yet to be accounted for..It is estimated to be worth around 2.2 Bn.Dollars.

f)      Indians buy Gold traditionally as investment and  hedge against Inflation .

 

g)     There are no avenues in the Rural area for investments. No Share market  ,No Mutual funds . Not much scope for  Real Estate . Therefore, Gold is considered as best investment because Gold is Most Liquid Asset.  That is  why in India  even in a smallest village you may not find a Ration shop but you will definitely find a Jewelry shop and at least one Money Lender (Saukar)

h)    When there is ONE % increase in Income, Trade in Gold goes goes up by 1.5%

i)       It is estimated that Gold in India if sold in the international market, it will take care of our Oil Bill for 5 years.

ELECTRONICS   There is now craze for I phones, I-pads, laptops which are not

                    made in India . UP Govt imported 5 lac Laptops for free

                    distributors to Voters as  Election  promise..

EXPORTS   a)  Our exports are textiles, engineering goods ,leather, goods etc.                       

Some how our  EXPORTS are not matching Imports .That is why there is huge Current Account Deficit .We are not able to attract foreign Investments And there is no sign of improvement in the near future and therefore  Rupee is Depreciating

IMPACT -  of Rupee Depreciation

Positive –Who would benefit by Rupee Depreciation ?

a)     Exporters will benefit because they will get more Rupees

 

b)    IT Companies who have got their Contracts signed in Dollar Terms will get more Rupees when they receive the payment. TCS  ,Infosys,Wipro Shares are doing very well .

c)     NRIs  who send remittances for investment or for  maintenance of their parents/relatives will get more Rupees for the same amount of Dollar

Negative – Impact

a)     Oil Companies will have to pay more rupees to get same amount of Dollars

 

b)    Indian Companies who taken loans from abroad under ECB or other arrangements will have to pay more rupees for the same amount of Foreign Debt and for  payment of installment / interest

c)     Those who have  sent their children abroad for education will  have to pay more rupees for the same amount of Dollars to be remitted for their course fees, maintenance, lodging ,boarding, Laundry, hostel charges etc.

d)     International Travel will become costly. Those Indian Tourists who are planning their tours abroad will have to pay more for their expenses abroad.

e)     FMCGs who use imported materials in their product like cosmetics, 
 creams, shampoos will increase their prices.

f)      Multi National Kitchen chains like McDonalds, KFC, Subway who import Kitchen Equipments will increase their prices.

g)     All fancy gadgets like Mobile phones, Apple Phones, I-Phones, I-pads, Laptops will become costly.

h)    Prices of imported Chemicals and fertilizers used by farmers will become costly so also the final product.

i)       Lot of pulses and  oilseeds  are imported by India will become costlier.

Therefore , who will be most affected by  Rupee Depreciation it  will be the common Man who does not deal with Dollar who has not seen  even One  Dollar Note  will be MOST affected guy  by rupee Depreciation.

 

It is very simple. To bridge the Gap between Import and Export Govt. will require more Rupees to buy same amount of Dollars and from where these Extra Rupees will come ?

Govt. will have to increase the taxes and  prices of  petrol, diesel  and gas  .

And when prices of diesel and Petrol goes, cost of movement of essential commodities also go up which will lead to high Inflation.

 

Now Where do we go from here ? There is a fear that the International Credit Agencies will downgrade India which will send wrong and negative signals to Foreign Investors and therefore they will be discouraged from investing in India – so new Dollar investment will not come. There is a fear WAR in  Syria .

Therefore, I will not be surprised if the joke that Dollar will touch  Age of -------------- does not come TRUE.

 

Thank you for your patience. I hope I have not spoiled your evening.