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Durudarshan - Investment Analysis

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Indian Rupee fall overdone

Posted on August 22, 2013 at 8:21 AM
You know, there was a time when Twelve and a half Indian Rupees exchanged for a U.S. Dollar.
Today, the rate is 65 Rupees to the Dollar.  Hardly a month ago, it was 55 Rupees.
For a country with U.S.$277 Billion in reserves, and a debt to GDP ratio of about 27 percent, this is
clearly selling the Indian Rupee too cheap. 
What sort of policies have been in place that the currency has virtually fallen 400 percent against the greenback, in a period of less than two decades, when the growth in India has been quite healthy while the mature economies have structurally slowed down? 
What is the purpose of encouraging foreign inflows of capital which periodically take flight and cause a panic in the markets? 
Of course, with the Rupee at current levels, most overseas investors see this as a golden opportunity to invest in India.  And the Finance Minister, Mr P. Chidambaram, has confirmed that inflows have been very healthy, and as it is absorbed into the system, a healthy picture will emerge.  Growth for the 2nd half of this year is expected to be much improved, with exports increasing month on month.
Can't blame anyone for snapping up quality Indian goods at ridiculous prices, can you?
 
The Reserve Bank of India's repo rate of 7-1/2 percent is really responsible for the slight slowdown that Indian industry and consumerism have seen over the last year and a half.  When the picture is so healthy, why should the RBI offer such a high rate to attract overseas investment?  When compared to the mature economies, the differential is more than 5 percent and as much as Seven and a quarter percent.  Is anyone listening?  What is the logic of it?  When India has enough for good growth, why does she need foreign inflows which periodically make the currency bleed?
 
The best announcement is that the RBI will not take any policy measures to try and curb the current and temporary fall of the Rupee to the absurd level. 
 
On 5th September, the new Governor of the RBI will assume his office, and both Corporate India and the public wait with hope to see what path he follows to restore robust growth and much need relief for consumers in India.  More people wish to buy houses and cars, take out loans for education and travel.  India needs must add to the world economic growth story, and an orderly drop in the repo rate would prove the tonic.
 
Kind regards,
Duru-darshan.
 
 

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