The Rupee is the Least of our Problems - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 17 August 2013
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The Rupee is the Least of our Problems A  A  A


- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
Earlier this week, the RBI increased restrictions on capital outflows in order to support the ailing rupee. The aim of this policy is to reduce investment outside India so that funds stay within the country. In theory, this should help the rupee because individuals will be restricted in their ability to sell rupees in exchange for dollars.

Over the last few weeks, numerous restrictions have been placed all with the aim of helping the rupee. Unfortunately, it has been a fruitless exercise. The rupee remains near its all time lows. Most of the restrictions placed are seen as signs of desperation, and so sentiment around the currency has worsened further.

The main problem with the current approach is that it is entirely focused on stopping the rupee from depreciating. Rupee depreciation is a symptom of a widening current account deficit, falling GDP growth, and excessive corruption. If we are only focused on treating the symptom without treating the underlying cause, the problem will not go away.

Instead, we need to focus our efforts on the three underlying causes. We need to boost growth, reduce our current account deficit, and get tough on corruption. Short-term fixes, such as the restrictions recently announced do not address these causes. These underlying causes are long-term issues, and they require long-term solutions.

In fact, rather than battling to help the rupee, we should allow the currency to depreciate. A weaker rupee will boost our exports and reduce imports in the long run, and this is critical to fixing the current account deficit and improving GDP growth.

The value of the rupee is determined by a host of external factors. This includes the value of the dollar, global equity markets, global commodity markets, and foreign investor sentiment. Most of these are largely out of our control. This is why we cannot make the rupee go up no matter what restrictions are put in.

If we examine all the issues facing the Indian economy, the falling rupee is less important than others such as growth, employment, inflation, etc. We need to stop focusing on trying to fix the rupee, and start focusing on trying to fix the economy.

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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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16 Responses to "The Rupee is the Least of our Problems"

M.K. Sreedhar

Aug 20, 2013

The methods of cure is worse than the decease!. The cure thought of is only to treat the symptoms as rightly pointed out. China delibeately kept its yuon deprecated against US$ for a long time and used it to boost exports. The Rupee is sliding down against US$ as there is a perception that India needs large amount of US$ to meet its import commitments. There is a considerable deficit of trade balance as we have failed to earn more foreign exchange by gearing up exports. Instead of complaining about sliding Rupee can we not make use of this situation to boost exports? Perhaps, then the Rupee automatically would gain strength and the slide is arrested. Inviting FDIS and FIIs by by relaxing conditions/limitations and regulations, which are needed to maintaining soverign prerogatives is not the only a temporary measure like the pain killer and not a permanent solution. Let us diagnise the problem and find an appropriate solution to strengthen the rupee.

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sunilkumar tejwani

Aug 19, 2013

no politician worth his salt will ever to address the problem of corruption, simply 'cause he is a part of it. It is a shame on our country that the prime minister has no control on his minions, in fact, minions are calling the shorts and he is silently watching/ presiding over such shameful acts. not the dog, but tail is wagging the dog. God save our country, Only a violent public reaction can do some thing to eradicate corruption.

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Amit Rao

Aug 19, 2013

Couldn't have put it better myself.

Amit Rao.

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Senthilkumar G

Aug 19, 2013

Dear EQUITY MASTER, Every time, on Each and Every issue, your opinion is simply and realistic. I wonder that how our bureaucratic and diplomatic Celebrities are not considering these issues in such a realistic manner. Your latest week end article with JIM Rogers comment is very very shame to our economic administrators

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Rama Rao Thota

Aug 18, 2013

I echo Asad view. In addition to it, we(its not only you and me but also every single Indian) should start focusing on reducing corruption... while I write this, I know its really impossible to eliminate corruption because of so many factors involved. If we start doing it today, we may achieve it at least after a few decades . The corruption has gone to root level where everyone talks about it but a negligible number of people try to address it.

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R N Gandhi

Aug 18, 2013

Government Should announce Amnesty scheme to bring back the dollars kept in Foreign Banks by the corrupt Politicians and Industrial Houses in the interest of the Nation. Morally it is wrong to give amnesty to corrupt persons. But who will take the strict measures against this powerful lobby? India needs foreign exchange very badly and urgently. I think in the interest of the nation Amnesty scheme is the alternative.

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satish s dabholkar

Aug 18, 2013

We all know this but our finance minister do not understand as he took his decision based on it's POLITICAL weightage.

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Swaminathan.K.V.

Aug 18, 2013

Rupee weakening is to be treated as a national problem. Much progress can be achieved only through people's revolution involving most of the common man. Intellectuals should think as to how our men can individually and collectively sacrifice and adopt to the changing situation and give call to the people. It is tough situation. Will take long time and needs patience.

















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Alphones

Aug 18, 2013

Dear Assad, I have few comments:
1)Quick fix solution; This is like a cecearian surgery just after 7months of a pregnancy. Now a days, why to carry a heavy load of pregnancy for 9months when there are experts to help in a quick way. Here, in the surgery, anaesthesia and chopping is involved. This may sometime disaster and lead to death. This is what is happening today. Easy come, easy go(quick fix FII,s).
Why we face economic problem? Why the curency is falling against dollar? "OIL IMPORT" How many drilling companies India have? How many drilling rigs we have? Normaly, one rig can drill one bore in one month and pay in rupees. 67 years count? Now foreign companies have to drill in Rajasthan. Even if 25% oil come out of a well, it may be still helpul.
This is what America did all these years. When the oil was cheap, they imported and kept on drilling and capped. I believe you are sitting in US and please ask if you have any friend who is working in the oil industry.
2) You say let the curency fall and benefit the export. How much is the export now, when there is no one to buy?
3) Do you think this much population is needed for India?
Indians are experts in...prduction...
4) You as a media, do you willing take up such things to our rulers?

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Anil

Aug 18, 2013

Situation is worsening because of loss of credibility of the present ruling setup. The present government is plagued by policy paralysis. Its word is not taken on face value. It is not seen as one, which can see through its agenda. Senior govt officials- who have more than a year service left, are deferring even crucial decisions, which is affecting governance. All because of the uncertainty, surrounding around the return of present political establishment to power in coming general elections, even though it is most likely. The only course left now is to go for immediate elections in order to remove the uncertainty- who will hold reins of power for next few years. But the catch seems to be- present ruling dispensation has serious doubt about its chances of returning to power. So it is better to stick on, as long as one can. Country can take care of itself.

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