Recently rupee rolled down against the dollar, with the dollar being valued at over Rs. 63. This devaluation comes at a prime time when I've started working and so it certainly is a boon. Though it's important to understand why this is happening, is it a big deal and what is the future going to look like.
The value of Dollar vs Rupee is a simple case of supply and demand. The rise of the Dollar's value against the rupee implies that people are converting Rupees into Dollars. This cash flow is happening for a number of reasons -
The US Federal Bank is probably going to cut down on it's quantitative easing. (Quantitative Easing, or QE, is a phenomena in which Fed buys central bonds and hence maintains their high price which keeps the rates low. This incentivizes people to invest their money elsewhere like in stocks or maybe buy a house or a car. This helps in revitalizing the economy) With the Fed suspected of cutting down on this venture, investors plan on flocking back to the US bonds as a safety haven and hence taking their money out of other countries.
The Indian economy also doesn't seem to be doing to well. It's account deficit (which is the net value of imports - exports) has ballooned to about 4.8% of GDP, i.e. $88.2 bn. The stock markets seem sluggish and there are impediments to FDI in different sectors. The economy grew at just 5% in 2012-13, the lowest in a decade. This is leading foreign investors to take their money out of India which is leading to a drop in the Rupee.
As a result, Indian bonds have become less attractive and hence the yields have risen. Foreigners have taken out $10bn since May 22 and the 10 yr bond yields have risen to 9.23%. This means that the central govt will pay interest @ 9.23% if it borrows from anyone. This rise in interest has also led to a rise in interest across the board with both savings and loan interest rates rising that will make getting a loan more expensive.
Now, on the other hand we have a strong 25 million Indian diaspora that is taking advantage of this rate and pumping their homeland with much needed foreign reserves. Volumes in the last few months have been 20-30% than that seen during regular months.
The Indian government also recently introduced certain fiscal changes that restricts foreign investment by Indian citizens and corporations and it also restricted imports of gold that led to a jump in the price of the bullion.
It seems clear that the solution is a higher growth to attract the Foreign Investors back. The Rupee will probably continue to slide to 64-65 and maybe to 67 but then certain sectors need to be opened to FDIs and exports should be energized so interest in the Indian growth story is back.
Until then.. NRIs - Cash Out!!
The value of Dollar vs Rupee is a simple case of supply and demand. The rise of the Dollar's value against the rupee implies that people are converting Rupees into Dollars. This cash flow is happening for a number of reasons -
The US Federal Bank is probably going to cut down on it's quantitative easing. (Quantitative Easing, or QE, is a phenomena in which Fed buys central bonds and hence maintains their high price which keeps the rates low. This incentivizes people to invest their money elsewhere like in stocks or maybe buy a house or a car. This helps in revitalizing the economy) With the Fed suspected of cutting down on this venture, investors plan on flocking back to the US bonds as a safety haven and hence taking their money out of other countries.
The Indian economy also doesn't seem to be doing to well. It's account deficit (which is the net value of imports - exports) has ballooned to about 4.8% of GDP, i.e. $88.2 bn. The stock markets seem sluggish and there are impediments to FDI in different sectors. The economy grew at just 5% in 2012-13, the lowest in a decade. This is leading foreign investors to take their money out of India which is leading to a drop in the Rupee.
As a result, Indian bonds have become less attractive and hence the yields have risen. Foreigners have taken out $10bn since May 22 and the 10 yr bond yields have risen to 9.23%. This means that the central govt will pay interest @ 9.23% if it borrows from anyone. This rise in interest has also led to a rise in interest across the board with both savings and loan interest rates rising that will make getting a loan more expensive.
Now, on the other hand we have a strong 25 million Indian diaspora that is taking advantage of this rate and pumping their homeland with much needed foreign reserves. Volumes in the last few months have been 20-30% than that seen during regular months.
The Indian government also recently introduced certain fiscal changes that restricts foreign investment by Indian citizens and corporations and it also restricted imports of gold that led to a jump in the price of the bullion.
It seems clear that the solution is a higher growth to attract the Foreign Investors back. The Rupee will probably continue to slide to 64-65 and maybe to 67 but then certain sectors need to be opened to FDIs and exports should be energized so interest in the Indian growth story is back.
Until then.. NRIs - Cash Out!!
