How weak is the Rupee? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 15 June 2013
PRINTER FRIENDLY | ARCHIVES
How weak is the Rupee? A  A  A


- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
In the last week, the rupee hit a record low against the dollar. It now takes more than 58 rupees to buy 1 dollar, and some analysts are forecasting that this will rise to 60 in the near future. When we hear that the rupee is at a record low, our natural inclination is to assume that the rupee is a very weak currency. But this is misleading.

In the long term, currency values reflect relative inflation. The more inflation a country has the weaker its currency becomes. This makes intuitive sense, because when prices go up, each rupee becomes less valuable. Based on this logic, what should we expect to happen to the value of the rupee against the dollar over time?

Over the last 10 years, US inflation has averaged around 2%, while Indian inflation has averaged 8%. This means that every year, the rupee's value, in purchasing power terms, is lower by 6% relative to the US dollar. So, we expect that the rupee should depreciate against the dollar by an average of 6% per year solely due to inflation.

Given this metric, we can compare actual currency performance to what is expected purely due to inflation. Over the last 10 years, taking into account the rupee's recent decline, the rupee has fallen by a little less than 30% against the dollar. This translates into an average depreciation of 3% per year.

An average depreciation of 3% year is significantly less than what is implied by the difference in inflation rates between India and the US. What this means is that in real terms, the rupee has become more valuable against the dollar in the last decade. This due in large part to strong economic performance and high growth rates for most of the decade.

This year alone, the rupee has fallen 6% against the dollar. This is a weakening of the currency, even in real terms, as we are not even halfway through this year. While the rupee has been weak over the few months, over a long-term period this is not the case.

In the short term, it is certainly beneficial if the rupee doesn't fall too fast and if volatility is low. However, we need not be too concerned with the rupee's current weakness if we take a long-term perspective.

Comments on this edition of The Daily Reckoning: Post a comment! | Read comments



Enclosed - The details of our next small cap recommendation...

We have just will revealed our latest small cap recommendation.

In a nutshell, this company is the largest player in the organized segment of India's fitness market.

Over the last five years, the company has grown its revenues at a compounded average growth rate of 31%. And net profits have grown at a higher rate of 44%.

With increasing demand for fitness services, the company has introduced new value added services to boost its profitability. And the benefits of this are already visible.

Based on its performance, we expect the stock to deliver healthy returns over the next 4 to 5 years. And now, you have a chance to get it for much lower than its real value!

Yes! You can get full details about this stock when you try our small cap recommendation service, Hidden Treasure, for 30 days by paying just Rs 499!

This is a small fee that anybody can afford. And once this offer closes on 16th June, you won't get another opportunity to try Hidden Treasure at such an exciting price for some time to come.

So don't hesitate.! Click here for full details... and sign up right away...

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "How weak is the Rupee?". Click here!

11 Responses to "How weak is the Rupee?"

Penugonda Prabhakar

May 12, 2016

Iam Penugonda Prabhakar you always asking questions how to gains. iam many business doing. you always you recommend me. Economics always supported and any business. Not reduce amount. congrats .

YourLovely

Penugonda Prabhakar

Like 

H S Tiwary

Jun 23, 2013

First correct our policy makers to think in the right direction at right time then only all problems will be solved.We have the materials, labour,administration and will power.Our century old tradition of export is older than Koutilya's Arthashastra.

Like (1)

RK77

Jun 21, 2013

Assad, your logic of 6% depreciation per year (based on inflation difference) is not suppported by the data you have given. Inflation is measured differently in USA and India. Authenticity of data is different. Indian financial statistics have been revised so often in the recent past that their reliability is questionable. Political considerations often overrule economic factors in valuation of a currency.

Like (1)

naveen

Jun 19, 2013

Asad, the concerns are valid for Rupees weakness. Reason:
1) economic performance, growth rates (as stated in your own 5th paragraph). Prior growth rates can be achieved only if there are initiatives to "Significantly" improve economic performance.
2) Economic inclusion not isolation will give the real picture. eg. Current deficits. (Pay backs need to be made in the log term at higher rates with current lost opportunities)
3) the third paragraph comparison and arrival to a resultant of 6% is not valid. To be valid, the last 10 years performance of India and the country in comparison US should have equal economic and growth (not in percentage but in terms of dollars)

However, I agree, in isolation, Cross border trade for "value" will be in favor of India as it brings in more rupees back into the country. To point to note is, this is only true if there are enough resources to utilize them within the country. eg, Service sector, like IT, doing well to bring in dollars into the country as resource is labor and skill.

Regards

Like (1)

Raj Dhillon

Jun 18, 2013

I got my first payments in either USD or equivalent currencies from the year 1966 onwards. The equivalent in Rupee terms worked out to around Rs.9 to a dollar. In those days the Kenyan currency was linked to the Sterling & one got an equivalent amount in exchange. Similarly the Omani Rial & maybe the AUD etc were hitched to the USD. No matter how the Oil price fluctuated, certain Gulf currencies tangoed with the USD. Our own Rupee was linked to a basket of currencies. It would be nice to know the ratios. But it certainly does not keep abreast of the USD. This would be helpful if our exports - including manpower - was promoted with incentives etc. However, our balance of payments problem - notwithstanding gold imports - needs resuscitation. I don't know where our trade with Russia in Roubles stands after the USD took over. There is plenty of leeway there. Within the nation the transactions off-the -record have exponentially increased. This too needs to be contained. The value of the USD itself is greatly below intrinsic level. Our own GDP though helped minimally by our social endeavors, can be straightened by pragmatic checks & balances by way of revising our various tax, duty, excise & cess structures. We need to go a long way to put a true value to the Rupee and not follow the Pied Piper of a dollar.

Like (1)

Dinesh

Jun 18, 2013

INR is not as weak as it looks.
Compare the buying power of INR on food item in India, it has still some steam left, so a reversal of the exchange if happens, it will be dramatic and will heat up economy rapidly.

Like (1)

NS Rao

Jun 17, 2013

Long term and short term impact of rupee weakening need to be viewed holistically i.e considering all important economic parameters like trade deficit , balance of payments,impact of higher cost of imports like oil and other high bulk items & consequent runaway inflation and further widening of inflation rates vis a vis developed nations etc.
It has the potential to pull down investments and push inflation & unemployment -- upwards.

Like (1)

vijay kumar sharma

Jun 17, 2013

This is the one reason for falling of Rs. against USD Plesae let me know the other reasons for falling the currency

Like (1)

Pulin C Barthakur

Jun 17, 2013

Well, statistics is capable of telling the truth as well as telling a lie; it's all question of how much one is into spin-doctoring. The average person lives from day to day and ,certainly not the 10-year long term, and for him the Rupee's status horizon can hardly extend beyond two-weeks, perhaps.

Like (1)

Sudhir Dante

Jun 17, 2013

I think we also need to consider the actual value of the dollar itself compared to its own buying power during the same period of time we are refferring to. If that were to be considered and we were to take the actual value of the dollar and the amount of goods one dollar can purchase today verus 10 years back it could be that the rupee had not deppreciated at all.

Like (1)
Equitymaster requests your view! Post a comment on "How weak is the Rupee?". Click here!

Recent Articles:
A Darkness Is Spreading Across the US
August 22, 2017
Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.
Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working
August 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?