Only on WhatsApp, a Weaker Rupee Means a Weaker India - Vivek Kaul's Diary
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Only on WhatsApp, a Weaker Rupee Means a Weaker India

Aug 16, 2018

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In popular economic theory (for the lack of a better term) as it has emerged in India, a weaker rupee means a weaker India.

But the problem is that in the post truth era everything that reads and sounds right on WhatsApp, actually isn't.

As I write this, one dollar is worth around Rs 70.2. The rupee has been losing value against the dollar, and earlier this week, the dollar crossed Rs 70.

Six months back one dollar was worth around Rs 63.9. Hence, over the last six months, the rupee has lost a little under 10% value against the dollar.

This development notwithstanding, a weaker currency does not mean a weaker country. Let's try and understand why.

1) One Indian rupee is worth one 1.58 Japanese yen. This basically means that the Japanese yen is a weaker currency than the Indian rupee, given that one Indian rupee can buy more than one Japanese yen.

Does that mean that Japan is economically a weaker country than India? Of course not. Anyone suggesting that Japan is economically weaker than India because the yen is weaker in comparison to the rupee, would need to get their heads examined.

The Japanese per capita income in 2017 was $38,428. The Indian per capita income was around 5% of that at $1940.

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2) Let's consider another example here, that of India and Indonesia. One Indian rupee can buy you 208 Indonesian rupiah, which makes the rupiah a considerably weaker currency in comparison to the rupee. Does that mean that India is economically a stronger nation than Indonesia?

The per capita income of Indonesia in 2017 was $3847, nearly twice that of India.

Hence, long story short, just because the value of a currency is weaker does not mean that the country is weak. There is much more to this.

3) Of course, economics is a subject where we always like to say "on the other hand". Hence, in economics, only in rare situations definitive statements can be made.

In the past, there have been situations where the value of a currency has fallen dramatically against the dollar and other currencies, and the country has ended up in an economic crisis. One good example of this is the South East Asian crisis of 1997.

The value of the South East Asian currencies was pegged against the dollar. The value of the dollar was fixed at 25 Thai baht, 2.5 Malaysian ringgit and 2030 Indonesian rupiah. The central banks of these countries had to defend the value of their currencies and ensure that their value remain fixed against the dollar.

When foreigners sold the stakes they held in stocks, bonds, real estate and companies, in these countries, they were paid in the local currency.

In order to repatriate this money, they converted the local currency into dollars. This sent the demand for dollars surging. In a normal scenario, the value of the local currency would have fallen against the dollar, and the foreign exchange market would have adjusted.

But the central banks had to ensure that the value of their currencies continued to remain fixed against the dollar. This was done primarily to help local entrepreneurs (in particular finance companies) who had borrowed massively in dollars. Any fall in the value of the local currency against the dollar, would hurt the local entrepreneurs badly.

Let's say a Thai entrepreneur had borrowed a million dollars. When he got the money into Thailand, he would have to convert it into Thai baht and get 25 million baht in the process.

Now let's say at the point of repayment the loan, one dollar was worth 30 Thai baht. In order to repay a million dollars, the entrepreneur would now need 30 million baht to buy those million dollars.

Hence, central banks ensured that the value of their currency did not fluctuate against the dollar. How did they do this? As mentioned earlier, when foreigners repatriated money from these countries, they converted the local currency into dollars. This sent the demand for dollars surging. In a normal scenario, the value of the local currency would have fallen.

The central banks defended the value of their currency by selling dollars, and ensuring that there was never a shortage of dollars, in the foreign exchange market. This ensured that the value of their currencies against the dollar remained the same, or moved within a very narrow band.

4) The trouble was that these central banks only had access to a limited amount of dollars, they had accumulated over the years as foreign exchange reserves. They did not have an unlimited supply of dollars. The only central bank which has an unlimited supply of dollars, is the Federal Reserve of the United States (of course, we are talking about American dollars here), which can print or digitally create, as many dollars as it requires.

The central banks eventually ran out of dollars, and had to stop defending their currencies. In this scenario, the value of these currencies fell dramatically, and very quickly.

5) On 2 July 1997, Thailand decided to stop supporting the baht and let it fall. It was estimated that the baht would fall by around 15 per cent, but instead, by the end of July, it had already fallen by 20 per cent to 30 baht a dollar. A year later, one dollar was worth 41 baht.

The peg of the Indonesian rupiah and the Malaysian ringgit also broke soon. With their pegs broken, all these currencies lost value against the dollar. A year later, the Indonesian rupiah was at 14,150 to a dollar. The Malaysian ringgit was at 4.1 to a dollar.

Such a rapid fall in the value of the currencies led to an economic crisis.

6) The major point in the South East Asian crisis was that the central banks tried to defend the value of their currencies and lost. In an Indian case, the Reserve Bank of India, is clearly not trying to defend the value of the rupee against the dollar, at any cost. If it was, the value of the dollar against the rupee wouldn't have crossed Rs 70, as it did recently. My guess is, the RBI is only trying to slowdown the fall, as much as possible. Hence, India is safe to that extent.

7) Of course, all this does not mean that a falling rupee will have no costs. Imports will become costlier, especially oil. India imported close to 83% of its petroleum consumption in 2017-2018. Those who have borrowed in dollars and have repayments coming up, will need more rupees to buy the required dollars.

Things will become more expensive for students going to study abroad and tourists looking to holiday abroad.

On the flip side, remittances from Indians working all over the world, will be worth in rupee terms. Companies with earnings in dollars will earn more in rupee terms. Exports will become more competitive, experts say. (The truth is slightly more complicated. This deserves a separate piece which I will write sometime next week).

8) Equating the value of the rupee to whether India's is in a strong or weak position, basically started in the run up to the 2014 Lok Sabha election. A number of Bhartiya Janata Party (BJP) leaders turned it into a prestige issue for the country. One religious guru even tweeted that when Mr Modi comes to power one dollar will be worth Rs 40.

Given this background, the backlash against the BJP and the Narendra Modi government on this particular issue, on the social media and WhatsApp, is not surprising at all.

As the old saying goes, you reap what you sow.

To conclude, while the politicians can keep arguing about whether a weaker rupee makes India weak, you, dear reader, need to know, that the situation is much more nuanced than just being good or bad for India. And that means that you need to go beyond the WhatsApp forwards, to understand this issue.

You can start by sharing this piece among your friends and family.

Regards,

Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul's Diary

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Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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7 Responses to "Only on WhatsApp, a Weaker Rupee Means a Weaker India"

Rajendra Kanphade

Aug 21, 2018

Playing with statistical figures!
The Indian per capita income is notified as $1940. The concept of per capita income is of academic use or of the use of so called experts ( having extra quantity gray matter). It is meaning less unless you consider the income distribution among the smallest demographic units.

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NJC

Aug 18, 2018

I can accept that the rupee weakening against some other currency is not necessarily a sign of a weaker economy, though that could be argued, but in real day-to-day domestic life, the value of the rupee is measured not against some foreign currency, but against the goods and services for which it can be exchanged today. A cursory web search of what a rupee gets you today vis-a-vis what it got you a few decades ago, gives us some idea of the mind-boggling deterioration in the purchasing power of the rupee today, vis-a-vis its strength some time ago! Of course that can be countered with the fact that other currencies' domestic purchasing power has also deteriorated, and what was considered a 'good' salary then, won't buy you dinner for two at the Taj today; but the fact remains that if it takes 100 rupees to buy today what we got for one rupee then - then the rupee has failed to deliver the most important criterion of a fiat currency - to be a 'store of value'! And a currency that continues on this trajectory and ends up like the pre-war German Mark, can hardly be the sign of a prosperous economy!

Like (2)

Kapil

Aug 17, 2018

Some times the way a financial expert and a common man sees things are very different . A common man lives in reality bereft of the higher intellectual challenges being grappled by the economic expert. A housewife who runs the household efficiently on a tight budget and improves the quality of life for everybody in the house , is probably more competent because of the commitment and the stakes involved. The difference is that expert is working for an assignment or the given job , whereas the housewife is working for survival.

The Japanese currency was 2.5 yens against one paise many years back and today the paise has been replaced by the rupee. Dollar's strength is because it is perceived as a reserve currency and the most traded commodity . Unless we have our own concept of doing things , we will go wrong by blindly following the western economic concept . Sceptics challenged Baba Ramdev's brand and its way of doing things but today multinationals are copying him....

Like (2)

Sarvesh Sharma

Aug 16, 2018

As I see it, the fair value of any currency is its PPP value. Alas, the world is not fair. Even so, in the long run, allowed a free market, currencies would gravitate towards their PPP value at a varying pace depending on pace of relative improvement of economic and production efficiency by concerned the country.For example, British Pound was at 1 GB pound to 2.8 US dollar whereas Japanese Yen was around 300 for a US Dollar in 60's and early 70's. GB pound has depreciated heavily while Japanese Yen has hugely appreciated against US dollar. Given the inflation differential over decades, INR would have been well 100 to US dollar if relative efficiency improvement had not worked in favour of INR.

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virander kumar

Aug 16, 2018

There is no better way to explain the topic than this.Excellent.

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Tarun Datta

Aug 16, 2018

Super write-up . In this WhatsApp age of rubbish circulations this is a fresh wind.

Like (1)

C.Hebbale

Aug 16, 2018

One small correction:
Its mentioned in your column as
One Indian rupee is worth one 1.58 Japanese yen
Please note that the least count of Indian currency is 1 paise & that of Japanese currency is 1 yen. Hence its not correct to compare Indian rupee(100 paise with 1 yen).The correct comparison would be:
One Indian paise is worth one 1.58 Japanese yen

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