allow rupee to rise - 2010-06

8/9/2019 Allow Rupee to Rise - 2010-06

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ALLOW RUPEE

TO RISEBy Anil Selarka (Kalidas)

Indian Rupees's new symbol80% of India's econom ic problems w ill be autom aticallyresolved if Governm ent of India and R eserve Bank ofIndia aband one their 60 years old policy of deliberatelyw eakening the Ru pee and allow it to rise in its natural

course.

In fact, Indian Ru pee w ith solid backing of goldfrom the Indian pop ulation has p otential to becom e

W orld's leading "Reserve Currency" a s alternatechoice to U S Do llar and go ld backed Sw iss Francs

Indian R upee is already used by 1 B illion people- about 15% of world's population -


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Article Ref: 10-006 of 1 August, 2010st

India is a giant country that has seen the Best to Worst days cycle in last 2000 years. India

used to be the largest GDP growth grosser in first 12 centuries. Here is what Mr. Maddisonwrote:

According to economic historian Angus Maddison in his book The World

Economy: A Millennial Perspective, India had the world's largest economy

from the first to eleventh century, and in the eighteenth century, with a (32.9%)

share of world GDP in the first century to (28.9%) in 1000 AD, and in 1700 AD

with (24.4%).[8]

Most people, including Indian themselves, try to analyze the country under telescope and

microscope but fail miserably. They finally give up in despair w ith ITDC picking up their breath

with campa ign - Incredible India. Nothing hurts or glees the Indians except some false prides at

times, and India walks through the global economic forest like an elephant unmindful of

admirers or foes. The Indians worship Lord Ganesh the Elephant God in full symbolization of

the true nature of the giant country.

Rated as the poorest country only 60 years ago, the India has rediscovered itself in last 7 years.

Contrary to populist belief that foreigners robbed India of its true wealth, it is the Indians who

frittered away its glorious wealth to the foreigners. Indians are known to pun ish themselves -

they do fasting or eat one time for 3 out of 7 days in a week, roll themselves on roads to

worship the deities, lash themselves with cords, in manifestation of religious belief to purify

their souls.

Indias Central Bank - Reserve Bank of India, Prime Minister Manmohan Singh, Finance Ministers

Pranab Mukherji and erstwhile P Chidambaram, have robbed India of its real wealth by

constantly devaluing its currency - Indian Rupee - for over 60 years. Ask yourself and aftergetting an answer, ask these glorified leaders, why the hell the Indian Rupee shou ld have been

devalued by 90% over last 63 years when its population rose three fold, industrial production

rose ten fold, agricultural production rose twenty times in green revolution, its human exports in

the form of educated immigrants rose thirty times to western and gulf countries, its brainy

exports (software) rose almost 100 times and its GDP rose to the fastest rate over last few

years?

These leaders, some renowned econom ists, were classic book type bureaucrats who applied

their intelligence when common sense was required. As result, Indian goods were sold out

abroad damn cheap and made the imports of essential commodities expensive to almost entire

Indian society.


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Look at the following table:

! The table illustrates the

figures since 1973.

! In 1950, the exchange rate

was Rs. 4.7619 against Rs

47.61 today - 90%

devaluation

! In other words, the Indian

commodities were sold outalmost free of cost.

! Vital commodities like Oil

and coal were priced almost

100% higher raising petrol,

diesel, fertilizer,

transportation, electricity,

cooking gas, kerosene and

ATF for airlines.

How India imports inflation by devaluing Indian Rupee?

1. Most of the commodity prices are denominated in US Dollar. After years of paper tradingthrough derivatives to lower the commodity prices, the financial crisis brought them to halt,

and in fact they have started surging. The continued devaluation or proactive suppression of

appreciation of rupee by RBI intervention, what they call sterilization operation, the higher

commodity prices in the international market translate into higher prices in Indian rupee.

This forces the local producers of those commodities to raise the prices, resulting into higher

than expected inflation.

a. EXAMPLE 1: if steel or metal prices rise in international market in USD terms, the effect

is felt more in rupee terms due to weaker rupee. As result, the local producers raise the

prices. The real estate prices also rise due to higher input of these commodities such as

steel, cement, copper and aluminum.

b. SEBIs Role in flaring up inflation: SEBI introduced the futures and options in

commodities at most inopportune time. Most of the commodity contracts are non

delivery based and cash settled in rupee terms (what they call badla). For instance,

a contract of commodity A (say, steel, sugar, corn or soyabean) is cash settled without

any delivery. A speculator is encouraged to paper trade and bid up the prices on the

MCX w ith the hope to settling the trade on difference basis on settlement date. Due to

higher paper prices of such commodities, the physical market too gets fillip to get higher

resulting in higher inflation. These commodities are of daily necessities and form large

part of inflation index.

c. RBIs role in propping up inflation: RBI too promotes inflation by deliberately

devaluing the rupee or restraining its natural rise.

i. When the foreign funds bring in the dollars and try to buy in advance Rupee from

the free market, the RBI restrains them and give them better off market rates

to avoid their buying rupee from local markets. As result, the Rupee that should

have gone higher due to foreign funds inflow, turns lower or remains stable at themost.

ii. RBIs so called sterilization measure interfering in free market mechanism

restrains the Rupee appreciation that causes inflation by letting dollar

denominated commodity prices quoted higher in rupee terms. It encourages

speculators to engage into non deliverable commodity contracts with passive

participation of SEBI, that causes the local markets to boost those commodity

prices, resulting in double digit inflation.

2. Oil Prices - major inflationary factor encouraged by RBI: Large part of the Indias

import is due to higher oil prices. When the oil prices rose by 100% in $ terms, and Euro

also rose by 90% (from 0.84 to 1.60 sometime back), the effective rise in oil prices in local

currency (euro) in euro zone was significantly subdued resulting in low inflation and also low

interest rates.

a. However in India, due to RBIs reckless policy of intervention in the name of sterilization,

caused Rupee to fall from Rs 39 (during BJP time) to Rs 48 at present (devalued by RBI

under Congress government by 23%). The rise in oil prices were inflated more by 23% in

rupee terms, necessitating in higher Petroleum subsidy running into Rs 200,000 crores in

last 4 years.


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i . The government is then caught in di lemma. Either it has to cut the subsidy at the

cost of public outrage which may cause election loss or raise the taxes to balance

the budget avoiding deficits.

ii. The recent cut in oil subsidy by letting the market forces determine the petrol and

diesel prices, the mere rise of just 6% in oil prices caused the inflation to run into

double digits forcing the RBI to raise the interest 3 to 4 times recently by almost

1% point. It raises the cost structure in entire economy, reduces the housing

demand due to higher mortgage financing rates, reduces the Auto demand due to

higher car financing rates, lowers the disposable income in the hands of

consumers forcing GDP down and in general lowers the economic activity in everysegment that would finally lead India towards forced recession.

iii. Only RBIs misconceived policy of devaluing rupee by pro-active sterlization

actions tempering the free markets encourages inflation. Surprisingly, same RBI

and Finance Ministry, including Prime Minister, go on talking about free market

under WTO to reduce the taxes and open up the markets when their own deeds

on currency (Rupee) front acts diametrically opposite.

iv. No one hates Indian Rupee more than RBI, Ministry of Finance and

Indians themselves. Rupee is the face of the nation. It is also the most visible

child of the nation. We have to love our child and take full care of it. Look at

United States. In spite of its enormous economic problems, it always seeks

Stronger dollar even when the fundamentals do not warrant. Why do we

Indians, the Micky mouse imitators of American way of life in all aspects, do notfollow this basic rule to support our own currency? Why do we hate our own child?

v. All Indians should Ask themselves; do we want our chi ldren weak or become

strong, self supporting and earning more in adult life to help entire family

including parents?

vi. If that was so, why do we Indians go on depreciating our only child - Indian

Rupee - for over 60 years? When our child turns into adult after about 21 years,

we let him roam around free and start earning. If he does not earn and support

the family, he is ignored or abandoned. In that case, why do we have to support

the rupee even after 60 years, when leaving it alone could usher in new economic

age in India?

vii. The Reservation policy aimed at supporting Scheduled Tribes and Scheduled

Cast is almost similar. Why do not they grow up after 63 years of independence

and support themselves after first 21 years of adulthood?

(1) The reservation in every field has become a permanent license for them

to remain weak, backward and inefficient in their entire life.

(2) The merits therefore take a backseat, undesirable people man the

government departments, and the corruption pervades like a fire in the

dense forest.

b. The refineries lost money due to their portion of subsidy, common man lost in higher

kerosene or gas prices, airlines lost because of higher cost of ATF, land transportation

such as Railway and Road Transport cost higher due to inflated energy cost, and cost of

electricity rose due to higher inputs of basic raw material such as Oil, diesel or coal.

i . The energy bil l (Electricity + Gas + Petrol/diesel for home driven auto) constitute

almost 25% of household budget. The rupee devaluation by 23% since BJP rule,

shrank their disposable income by 5.75% (23% of 25).ii. As result whole cost structure in the country rose to unsustainable level, raising

inflation to almost double digits, requiring higher interest rates or tightening of

cash reserve ratio (temporary measure to restrain real rate rise).

c. Had the government and RBI allowed the rupee to rise, instead of weakening,

everything would have worked in reverse direction, causing the subsidy burden to fall

and inflation coming under severe check. It would have justified lower interest costs. It

would have also helped the government to save on interest expenses on public

borrowing. The budget could have been balanced or significantly improved resulting into

higher investment rating of India in international market, thereby improving the

benchmark interest rates for use by corporate borrowers for their business needs.

d. India never saw lower oil prices in the market even when the oil prices fell. The

continuos weaker rupee worked at cross purposes. India never saw petrol or diesel price

below Rs 9 per liter even when the oil prices fell to $9 per barrel .

e. The main enemy was RBI and its consistent policy to weaken the rupee at all time.

Reserve Bank of India is the most inefficient monetary institution in India. Almost all of

its actions suck and they invariably give wrong advice to the Government of India

hurting the whole nation. The surprise is - almost all ordinary Indians, intelligentsia,


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critics, analysts and economists admire the inefficient and ignorant officials sitting

behind the fortress on the Horniman Circle in Mumbai without realizing that these guys

or babus are hell bent on hurting the Indian economy.

RBI is the single most institution to make the India poor and fritter

away its glorious wealth. Either it should have thorough overhaul or

disbanded altogether.

f. The RBI officials simply do not have international exposure in monetary affairs. RBI

vented out its frustration at one time lamenting rise in Forex reserve because it was

unable to manage it. If China could manage over US$ 2 trillions of Forex Reserve, why

not RBI manage just 15% of it - about US$ 300 billions? If these guys can not managethe Forex reserve of modest size, they forfeit their rights to manage Indias economy.

g. FOREX reserve is more like balance in nations savings account. Do we want to see our

savings account balance to go lower or higher? Higher of course, then why does RBI

want to reduce Forex reserve by discouraging foreign funds inflow? Only because it is

unable to manage it?

h. RBI does everything to lower the rupee. Every action sucks and run in that direction. It

lowers the interest rates on NRI deposits, 50% lower than domestic deposits, so that NRI

do not buy rupee and help it maintain its weaker rupee stance. Why? During Forex crisis

in 1992, it was NRI who lent billions of dollars free of security. Even Britain asked for

gold as collateral, NRI did not. NRIs are therefore treated like disposable towels.

3. Asian Crisis, Rupee and Thai Baht exchange rates - Comparison

a. Before Asian crisis, the Rupee was at 36/$ level and Thai bahts at 25/$. After the Asian

crisis erupted, the Rupee sank to Rs 48/$ and Thai Baht fell to 56/$ level on 1Jan98.

However, as of today, the Thai Baht has improved to THB 32/$ whereas Indian Rupee

has remained at same level of Rs 48/$. Now, ask yourself

(1) Which is the better and stronger economy - Thailand or India?

(2) Where is the maximum money flow - Thailand or India?

(3) Which has the most vibrant stock market - Thailand or India?

(4) Which country has higher GDP growth - Thailand or India?

(5) If that was so, why Thai Baht should appreciate by 42% and Indian Rupee

weaken by 2%?


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b. It is absolutely clear that these three musketeers - RBI, SEBI and MOF (Ministry of

Finance) have consistently worked against the broader interest of India and entire Indian

population by devaluing the rupee at all the time.

4. Indias Debt Level, Debt Servicing and Effect of Indian Rupee exchange rates:

a. The rupee should have been at Rs 26 to dollar level against Rs 48 to dollar now. That is,

appreciation by at least 50% in normal course.

b. Indias debt at about US$ 120 Billions translate into Rs 576,000 crores @Rs. 48/$. Had

Rupee seen the rise by 50%, same debt would have been at Rs 312,000 crores (@ Rs

26/$) or about Rs 254,000 crores less than what it is now. The interest borrowing cost ofthe government in that case could come down saving almost Rs 25,000 crores annually.

c. India could have used part of its foreign exchange reserve to retire at least 50 Billions of

external debt in phased manner.

d. To earn $ 50 billions from exports, need increase in Export Revenues by $ 500 billions

(presuming 10% profit margin and presuming that not a single dollar goes bad which is

impossible). $ 500 Billions rise in exports? It is 50% of Indias $1 trillion economy! Does

India have any major industry that could turn in superlative export turnover of $ 500

Billions? Even if it has, who is going to buy in international market which is in severe

recession?

e. By letting the Rupee to rise, the national debt level could be reduced significantly that

would raise the rating of the government of India, and also the entire corporate sector.

f. The stock markets could also rise by 35% at least, which can be used by the Governmentto sell its stake in many of government owned companies to realize the cash from the

market instead of levying taxes on its citizens. In fact, government could afford to

reduce the taxes of individuals and corporate sector simultaneously. That would propel

the markets even higher.

g. Lower interest rates, higher rupee, lower import costs of major inputs such as oil and

coal, lower commodity prices in rupee terms due to higher rupee reducing the inflation

and higher rupee savings in the hands of individuals and corporate would raise the GDP

to unbelievable double digit level surpassing even China, and also making huge am ount

available for key infra structure projects. It will be a Win-Win situation for all in India -

Individuals, Corporate and Government itself.

5. Will EXPORTS be affected?

a. To some extent, some hard goods manufacturers might be affected but will be balanced

out in 6 months or so. Those who want to buy Indian goods, they are going to buy it,

whatever be the price. They are buying goods, not currency. Are not people buying Real

Estates today at whatever price even after 50% rise in property prices? Stark necessities

dictate demand, not the weak or strong currency.

b. Major export industry is Software which is mainly a service industry. The outsourcing is

not going to stop. If rupee starts rising, those on the sideline may have to jump in and

sign the outsourcing contracts before it is too late. Did Indias software sector lose

competitive edge during BJP rule when the Rupee rose to almost 39/$ level, a rise of

20%? Absolutely not. And those companies who want to out source, they are going to

use India because it is the only English speaking country with indispensable talents.

c. Higher rupee could also cause migration of student overseas due to cheaper education by

25% to 50%. There will be less demand at home that would cause corruption cost toease. The donations will no longer be necessary because overseas window has opened.

The people will compare - is it cheaper to study abroad due to firmer rupee or at home

with higher cost of corruption? Even government would not m ind higher exchange

allocation to soften the pressure on rupee.

6. Foreign Investment to rise..

a. There will be increased money flow from overseas. The overseas investors will not only

gain from the rise in equity prices, but will also gain in exchange, making return in their

home currency almost double. They wou ld buy more equities or increase FDI (Foreign

Direct Investment) that would help massive power, road, water, ports and infrastructure

companies.

7. Government of India to benefit most..

Government of India will be the biggest winner in Rupee Rise game. Following are the

advantages for the government:

i. Its oi l bil l wil l come down signif icantly. Higher rupee may also act as antidote

against higher oil price.


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i i. Oil subsidy level will come down significantly, much faster than the present policy

envisages.

iii. Indias refineries will welcome the lower rupee. Its purchase cost would be

trimmed with the result its working capital requirement will go lower. The

margins will w iden that wou ld generate positive cash flow for further investment.

iv. Nations oil explorers like ONGC, GAIL, PETRONET, RIL/Essar can make more

strategic acquisitions overseas with stronger rupee. Their cost of acquisition

would come down by almost 50% resulting into higher inflow of feed stocks at

cheaper prices. Such benefits could also usher in the era of falling oil prices for

next 10 years in India to the glee of Indian consumers, Domestic Airlines and

Auto manufacturers who would see higher demand for their vehicles.

v. Indian debt level may reduce in rupee terms. Its external debt servicing cost may

come down by 30% at least.vi. The budget will turn to black with this master stroke of changing the

Rupee policy. The government can now think of reducing taxes, rather

than increasing them, getting it desired votes from all consumers.

vii. There would be no need to pursue the policy of appeasement to Scheduled Tribes,

Scheduled Casts and Backward Tribes by following reservation policy any longer.

If they do not vote, other higher ups will vote. Further, the government will have

more disposable funds to help those backward communities with real fund based

help, rather than displeasing the vast urban community with unfair reservation

policy. The merits will begin to take hold of every corner of Indian society.

viii. Government of India will become one of the richest government in the world.

(1) It holds and controls more than 200 state owned enterprises many of them

are listed entities. No government in the world, including USA, own that

many listed enterprises.

(a) It was Jawaharlal Nehru who started the industrial revolution by

setting up massive State Owned enterprises, such as SAIL, Oil

India, ONGC, MMTC, IOC, BPCL, HPCL, HMT, SBI, BHEL etc.

(b) It was again Jawaharlal Nehru who set up the four units of IIT


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(Indian Institute of Technology) that created the hotbed for

massive IT Sector we see in action today. It is significant to note

that while Nehru created 4 IIT without palpable resource, Indias

subsequent governments could create only one more unit in last 60

years even with hundreds of thousands of crores.

(c) That is why we call Jawaharlal Nehru as visionary. He was the

single most person credited with providing most affordable school

and higher education. The modest guys like Narayanmoorthy of

Infosys would not have existed without cheap education in his time

that was the greatest gift of Nehru.(d) It was Indira Gandhi, daughter of Nehru, who converted petty small

private banks into massive 16 nationalized banks as we see them

today. Count the market cap of all nationalized banks and that of

SBI; you will know what she had created.

(e) Nehrus vision and book Discovery of India should be re-

christened Rediscovery of India.

(f) Even Gandhi wil l smile broader than his ghost looking smile seen

on Indian Rupee. His dream of up lifting of poor masses could be

truly realized after 60 years if the currency note on which he is

sitting is allowed to appreciate.

(2) The doubling of stock market from present level, influenced by lower

interest rates, higher GDP growth and lower taxes, would almost treble themarket cap of its controlled enterprises.

(3) It can now afford to dilute its stake and privatize them at much higher

prices than now. The budget surplus w ill simply grow beyond wildest

imagination helping government to reduce the income Tax below 16%.

Surcharge on income tax or service tax will no longer be necessary.

ix. Roads, Railroads, Ports, Water dams, Power plants will now be built at much

lower cost than ever before. The real prosperity will travel from the coastal areas

to hinterland the way the Chinese economy has prospered from outside to inside

core.

x. India can then afford to have free float of Indian Rupee to make it as most

indispensable currency in the world. It could be used as worlds safest currency

due to enough backing of gold in India. It is the English speaking country after all

with open democracy. All benefits of open democracy will now be felt with more

consciousness than ever before. RBI will have more role in managing monetary

policy than inventing economic policy wh ich is the core function of the

government or law makers.

Let India put at rest its disastrous policy on Indian Rupee for good. Let new symbol start its

journey with the position of strength. Sorry, RBI - this article may not be to your taste, but

then, someone has to bell the cat. Kalidas is honored to do that job.

Anil Selarka (Kalidas)

Hong Kong, 1 August, 2010st

Document DetailsMain Statistics Characters 18898; Words 3831; Sentences 246; Lines 347; Paragraphs 86; Pages 7Document Ref Number 10-006 Date 1Aug2010 Author Anil Selarka Screen Name KalidasOfficial Title ALLOW RUPEE TO RISE Copyrights 2010 Anil SelarkaKey Words Rupee, India, GDP, Devaluation, Intervention, Strong Rupee, deficits, subsidy, RBI, SEBI, MCX

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allow rupee to rise - 2010-06

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