The Upside to the Rupee's fall - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 6 July 2013
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
The Indian Rupee continues to hit record lows. On Friday, the RBI had to intervene to prevent the rupee from falling too much too fast. The main reason the rupee is suffering is that we have a large current account deficit. At the same time, foreign inflows are not high enough to make up the difference, and this causes the rupee to fall.

In the short term, a falling rupee hurts the Indian economy. Crude oil prices go up in rupee terms, and this has the potential to increase the current account deficit even further. Gold prices also go up, and despite the government's best efforts, demand for gold remains strong. Finally, foreign inflows suffer when the rupee falls, and this hurts the stock market in the near term.

In the long term, a weak rupee is good for our economy. When prices go up, in the short term we usually continue to buy the item. In the long term, we adjust and substitute away from an expensive item. Currently, the falling rupee means our crude oil imports are going up. In the long term, since crude is more expensive, we will substitute to other fuels like natural gas that are cheaper.

Over the long term, a weak rupee will reduce our imports because imports are more expensive. This will reduce the size of the current account deficit. A weak rupee also has another long-term benefit. Our exports will increase because our goods become cheaper to foreign customers.

When exports go up and imports go down, our current account deficit will shrink. This is good news for the economy. It will improve GDP growth, reduce our dependence on foreign inflows, and the rupee will stabilize. Thus, we need to allow the rupee to fall and not worry too much about it. We should be concerned if the falls are too rapid. In this situation, the RBI can stabilize currency movements and reduce short-term volatility.

The reason the rupee is suffering is our large current account deficit. Over time, the weak rupee will correct this deficit if we allow it to. Despite the short-term pain from weak rupee, there is potential for considerable upside gain.

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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!

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10 Responses to "The Upside to the Rupee's fall"

Valerian Menezes

Jul 13, 2013

Perhaps yes. But when will we reap this benefit? After all of us gone? What's the use?

Like 

Yatin Parikh

Jul 9, 2013

Assad are you for real ? if the rupee is depreciating against the dollar because of the CAD and FII's pulling out money from the stock market, how come the dollar did not fall when the US market took a huge hit and money flowed out of their country ?
and in case you forgot, the americans are sitting on trillion dollar debts.

Like (1)

Rajesh Sutaria

Jul 8, 2013

Dear mr. Dossani,
You are not telling us some great secret about economy. People are not interested in reading some oft written stuff. Please tell us what wii be the currency rate in next quarter and what is the out look for rest of the year looking at India's import / export projections and based on your expertise. Talking in general makes no sense and it's not a rocket science. A man on the street also understands this basics.

Like (1)

UDAY MEHTA

Jul 7, 2013

RUPEE WILL CONTINUE TO WEAKEN AS LONG AS CORRUPTION GETS STRONGER. OUR COUNTRY HAS FORGOTTEN THE LIVES OUR BROTHERS & SISTERS HAVE LAID TO GET INDEPENDENCE. MAHATMA GANDHI = LIVE & LET LIVE. UNLESS THIS FEELING RETURNS RUPEE WILL CONTINUE TO WEAKEN OVER THE YEARS. WHAT IS THE DIFFERENCE BETWEEN BRITISH RULERS & THE INDIAN RULERS ... OUR COUNTRYMEN NEED TO THINK. GOD BLESS US ALL

Like (1)

Amitt Sen

Jul 7, 2013

Really worth to read,but not mention the time frame.Which we requite

Like (1)

Mukul Bora

Jul 7, 2013

Depreciating rupee against currency like US Doller will hurt Indian Economy which is already slowing down and because it is heavily dependent on imports

Like (1)

Arun

Jul 7, 2013

I really wonder if this article of yours is for junior college students. It's so bookish. In Indian economy does theory and economic principles work at all.

As your articles are circulated by Equity Masters for Investor Community and that to for Indian investors, it will be in order for you to put you views based on your experience from Indian Market and Indian Economy perspective the way it is run by Indian Ministers and Officials (except to certain extend by RBI).

Hope to see a change in your views which are more realistic.

Thanks.

Arun

Like (1)

mango man

Jul 7, 2013

how do you assume that with a weak rupee our imports will go down, and exports will go up ?

our main import is energy. with an uncontrollably growing population, we cant reduce this item of import, unless we switch to renewable sources, and we stop subsidizing it and heavily taxing it. And until we stop providing it free and unlimited to politicians & babus.

How do you expect exports to go up if our industries are highly ridden with labour strife / communists / uncompetitive by a huuuuuge margin ? And our industrialists are still crony-capitalists, resorting to monopolies and protectionism ? And our bureaucracy still lives in the bygone era of license-permit raj ? And nobody can move a pencil without having to bribe so many layers of government ?

Like (1)

N.D.Prabhu

Jul 7, 2013

In the long term, what is said is right, but as they say in the long term we are all dead. Perhaps the consolation we can draw is that we are leaving a better future for our progeny!

Like (1)

Tarun Kumar Singhal

Jul 7, 2013

A lot of India's Imports are price inelastic. Therefore, there won't be much favouable impact on CAD. UPA II will leave behind a bankrupt economy for its succssor to deal with. Tarun

Like (1)
  
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