A weak rupee is a sign of chronic illness.
According to the Big Mac Index, the US Dollar should be worth around Rs.26 or so or say Rs.30/- if we go by what is the considered view of the author Sree Iyer, on his article titled Why the Rupee exchange rate should be 30 to a dollar.
As against this, the official exchange rate is around Rs.67/-. In other words, the rupee is undervalued. This topic arose from a Question and Answer session with Dr. Subramanian Swamy at the Indian Merchants Chamber (IMC) meeting in Mumbai on June 16, 2016. According to Dr. Swamy, Rupee is undervalued for 3 reasons:
- Participatory Notes (PN) allowing withdrawal of Hot Money and distorting the Stock Market
- Speculation in the Stock market due to forward trading of commodities, PNs
- Black Money
One factor that is important, to my mind, is the difference in inflation between two countries that drives the exchange rates. Going back to the sixties, except for one spell around the 1974 oil shock, inflation in India has been always higher by around five to six percent every year.
Indians have two major pressures on the dollar rupee rate. The imports of Oil and the import of Gold…
In the early days, we had ‘administered’ exchange rates. This means that foreign exchange was rationed. Indian exports were tiny and finding $$ to pay for imports was an issue. So the demand for $$ was artificially kept down.
In 1947 the $ was around Rs.3.30. We were linked to the Sterling. In 1949, the Sterling was devalued and the $ fetched Rs.4.75. This rate was maintained till 1966, when India had its first devaluation. The $ was now worth Rs.7.75. If I take an inflation differential of five percent from here, the $ becomes worth around Rs.86, today. At a six percent differential it is worth Rs.138/-.
emand and supply of $ vs the Indian rupee is what in reality sets the rates. If there is an excess supply of $$, it becomes cheaper and vice versa. If we look at the structure of our demand and supply, our exports always lag imports. Thus, fundamentally, we are a deficit nation, which means that the rupee will keep sliding in to the pits, till the rupee cost starts deterring imports.
However, the rupee slides a little slowly because we get an inflow of $$ from some other sources – Our NRIs who remit foreign currency are probably our saviors. At some point, it will slow down as the third generation NRIs seek to make homes abroad and not remit anything. The other factor that helps India is the attractiveness as an investment destination (FII plus FDI). This keeps getting messed by successive politicians, so we get trickles as opposed to a flood that China received in the eighties and nineties.
Indians have two major pressures on the dollar rupee rate. The imports of Oil and the import of Gold are the main reasons for the dollar getting relatively more in demand. So, we have to pray that Indians start detesting gold and Oil becomes an unnecessary import if technology for alternative energy is allowed to bloom.
Taking the price of Big Mac or comparing rentals of a 1 BHK in New York vs Mumbai will give some gossip worthy numbers, but ignore reality. Our per capita is around $2000 and the US per capita could be around $50 to 60 thousand. So if we take the number of days of per capita income spent on food, clothing, rent, housing, etc we will get a better picture. And in any one country, these costs will vary from city to city and within the city, from place to place.
Big Mac Index is a nice cocktail conversation topic.et us recognize the factors that make the rupee slide continuously and shape our policies to do something in that direction. A weak rupee is a sign of chronic illness. I will be very happy the day the rupee is on par with the $. In the meanwhile, if we want some joy, let us have a new currency, where a hundred of the existing INR is converted in to ONE NEW INR. And maybe that will give a boost to the debased currency.
Solutions like nationalizing foreign assets of Indians, catching black money, controlling rupee etc are good for sloganeering. Doing the right things to make the Rupee attractive is what we need. It is a process and not a one-night change. Maybe we will get a leader one day, who will lead us with the long term in view. The right economic actions should also be combined with a good legal system that recognizes intellectual property as well as guarantee safety of capital. Our legal system is in need of urgent fix. That alone can give enormous respect for the nation and bring in a flood of foreign capital. Let us recognize the fact that we are short of capital.
1. Text in Blue points to additional data on the topic.