r2i forum

Have attached a chart of the $-INR rate from 1973 (as far back as i could go)....can you believe it the rate was 1usd = 7 bucks in the 80's:)..anyways...the chart is also a good illustration of our economic policies....what you see is how rapidly the currency has devalued since we started to go for economic reforms (early 90's) and trade with the world...

naturally as was the case with most Asian economies we focussed on exports and hence currency devaluation was not a need but a must to compete globally...it also helped the boom in the It space where India became the low cost IT services supplies in the 2000'...ok enough of history...

the point i want to make is that going forward as India becomes consumption centric economy from one focussed on exporting my sense is that the currency will have to slowly but surely appreciate versus the $..we cannot produce everything that our middle class consumers want and hence we need to import things more than we have in the past....can only do so if the local currency is strong

now most of us r2i'er have USD savings that we hope to convert one time or systematically into USD's. would like to hear people's thoughts on this issue. hope this helps.

I was talking to few people who came to US during the 70s. One of them remarked that during 70s and 80s the key reason for migrating to west was not economic/financial. At least not for the educated middle and upper class. Most of the people came to US not for work but to study and didnt left. In fact one of them mentioned that R2I was not a great option for them then, unlike for the current generation, because of low conversion rate and lack of suitable opportunities in India (fortunately both have been taken care of since then for us).

I dont agree with argument that if we become consumer centric economy we have to import more. In fact if we become consumer centric than we will produce more and more in India as it is cheaper to produce stuff in India, we have the capability to learn technology, have achieved good level of industralization already and have natural resources. We will not be able to produce everything but most of the things that middle class consumers want. Cars and automobiles are very good examples. As the demand is growing so is our capability to produce more and more in India. In fact India is on the way to become the hub of car parts manufacturing for european and south american countries.

Consumption will improve productivity, increase jobs and indigenization and will make us globally competitive. It will in fact make us more export oriented and will keep the INR low.

That said, future USD-INR conversion wont solely depend on how India manages in future but also how US manages in future. Given the ability of US to manipulate world markets through different means I would say the long term trends will be based on how US acts to rein in the debts and support the living standard. The impact of US actions on USD-INR rate will be far more than impact based on how India fares.

Nice Chart.

>> 1970 - 1990 was Indira Gandhi/Rajiv Gandhi golden era and truly india's lost decade. India was all about borrowing to survive
>>1990 Narasimha rao/Manmohan pledged gold and devalued 20% ( the year I joined workforce) and that is the spike and subsequent cleanup for another 5 years or so
>> 1995-2000 Golden era of Clinton years when $ was getting stronger and stonger with surplus instead of deficit and US was the envy of the world.
>>2000+ Bush era and INR has gotten into a distinctive trading range. India (or China) can allow market pure market forces to play, thereby stop buying dollars and allow rupee(or reminabi) to raise to say 30 or 35 to a dollar..but that is more detrimental with exports shutting off

In the near future, INR/USD will continue to be in the trading range with fundamentals favoring rupee appreciation and global competition for exports keeping it devalued

oasis138;295139Have attached a chart of the $-INR rate from 1973 (as far back as i could go)....can you believe it the rate was 1usd = 7 bucks in the 80's:)..anyways...the chart is also a good illustration of our economic policies....what you see is how rapidly the currency has devalued since we started to go for economic reforms (early 90's) and trade with the world...

Great chart. I recall going to Nai Sadak in Delhi in mid to late 80s and paying 16-18 rupees for the dollar to buy non Indian books.
Long term - rupee has to appreciate because of the growing GDP.
Will it ever go back to 7 rupees per dollar, or 18 rupees per dollar. I shudder to think of such times as it is hard to plan a distributed, de-risked global financial plan, especially for people with moderate amount of funds but who would like to do something global anyway.

The chart raises more questions than it answers:
1. Was the devaluation forced or voluntary? I believe the IMF forced changes after the crisis in 1990.
2. Are we to conclude that any sovereign can consume more than it produces ad infinum?
3. If we are "competitive" at 48 Rs/$, would we not be super competitive at say 60 or 100?
4. Is the term for export focused economies "mercantilism"?
5. Since all fiat currencies have no intrinsic value and long term go to zero, how do we guess any exchange rate into the future?

FCNR - NRI CD rates for USD
are fixed and governed by the RBI,
which remains the same for all of our Indian banks for a particular time-frame.

However, some banks like ICICI offers some OBU accounts with Singapore location
and they are also pretty close to those FCNR CD accounts, for terms and conditions
and many times they even offer higher rates than those FCNR CDs.

I have tried those ICICI's OBU branch Singapore accounts many times, over the FCNR CDs.

........

Oasis,
Nice chart.

I look at PPP implied exchange rates based on The Economist's Big Mac Index.

http://en.wikipedia.org/wiki/Big_Mac_Index
http://nextbigfuture.com/2010/02/implied-ppp-and-big-mac-exchange-rates.html

Factoring in the current exchange rate between Rupee and Dollar, Rupee is 65% undervalued compared to USD. Since the Big Mac index between these two countries can't be exactly same, thanks to India's beef with beef, it is an approximate comparison. Still it tells us that Indian economy will have to triple or the PPP per capita income of India has to cross $9000, for the justifying the current exchange rate.

That tells me that as time progresses, you will see Rupee getting back to 30s or even 20s against a $. It should as, India can't keep an artificially devalued currency when it joins much stiffer trade pacts as its economy merges with global economy at a larger scale. Just like how China is facing pressure to revalue its currency today, India may face the same music in 2020.

My bet is that Rupee would gradually appreciate and not depreciate. Two reasons for that :- 1) It is already 65% undervalued 2) India needs to grow and it will from 1970s/80s bottom levels.

PS: The big IF here is whether US economy will keep growing or at least remain relatively stagnant. If there is a depression, then all bets are off, as all US needs to do is to (e)print more bills.

Another way to look at KirKS analysis:

India PPP is ~3x of reported GDP, whereas developed economies such as US have PPP ~ GDP. As india's economgy grows the gap between GDP and PPP will shrink, and this will lead to increase in rupee value since PPP is higher than GDP because of lower prices in India (or lower GDP/capita or lower wages or cheaper currency)

If you look at the chart in the URL below, the PPP/capita decreased in last 2 years, even though GDP/capita increased during this period. In other words, INR did strengthen during this time.

http://www.indexmundi.com/g/g.aspx?c=in&v=67

[QUOTE]1. Was the devaluation forced or voluntary? I believe the IMF forced changes after the crisis in 1990.

It was forced. We had no money to pay for critical imports and to pay for the borrowing we already had.

[QUOTE]2. Are we to conclude that any sovereign can consume more than it produces ad infinum?

Theoretically yes. US is a good example. But one needs a mix of good luck, good strategy and great firepower ~industralization (same as things required for colonization)

[QUOTE]3. If we are "competitive" at 48 Rs/$, would we not be super competitive at say 60 or 100?

As a country it will depend on your import/export balance. If your imports>exports than no. Especially if you spend large part of imports on basic industrial needs like Oil, steel etc. Look at China as an example here.

KirKS;295429Oasis,
Nice chart.

I look at PPP implied exchange rates based on The Economist's Big Mac Index.

http://en.wikipedia.org/wiki/Big_Mac_Index
http://nextbigfuture.com/2010/02/implied-ppp-and-big-mac-exchange-rates.html

Factoring in the current exchange rate between Rupee and Dollar, Rupee is 65% undervalued compared to USD. Since the Big Mac index between these two countries can't be exactly same, thanks to India's beef with beef, it is an approximate comparison. Still it tells us that Indian economy will have to triple or the PPP per capita income of India has to cross $9000, for the justifying the current exchange rate.

That tells me that as time progresses, you will see Rupee getting back to 30s or even 20s against a $. It should as, India can't keep an artificially devalued currency when it joins much stiffer trade pacts as its economy merges with global economy at a larger scale. Just like how China is facing pressure to revalue its currency today, India may face the same music in 2020.

My bet is that Rupee would gradually appreciate and not depreciate. Two reasons for that :- 1) It is already 65% undervalued 2) India needs to grow and it will from 1970s/80s bottom levels.

PS: The big IF here is whether US economy will keep growing or at least remain relatively stagnant. If there is a depression, then all bets are off, as all US needs to do is to (e)print more bills.

I wont rely on Big mac index for PPP calculation as it doesnt takes care of lot of complexities/factors which governs the final price of a finished good apart from just the cost of constituent elements. A mix basket of basic products is a better reflection. Its good when you compare similar nations but using it for a comparison between a first world country and third world is not reasonable. That said the nominal PPP is 1 USD~10 Rs. If I use this than our currency is devalued by far greater than 65%.

[QUOTE]It should as, India can't keep an artificially devalued currency when it joins much stiffer trade pacts as its economy merges with global economy at a larger scale. Just like how China is facing pressure to revalue its currency today, India may face the same music in 2020.

I dont think we should consider what India is doing as keeping its currency artificially devalued. And comparison with China on this subject is not reasonable at all. India is doing what every other country does. On long term basis India is letting the currency follow the open markets intervening just on short term basis to reduce the wild swings that may be induced due to global market fluctuations or internal factors (inflation etc). Every country does that. China is the country which is keeping it currency devalued by artificial intervention (china pegs the rate and keeps it fixed for a duration). And guess what trade pact or no trade pact , china will probably figure in the top 10 importers for any country in the world.

here is how china does it (Dollar vs Yuan in 2009)
[ATTACH=CONFIG]2370[/ATTACH]

However I agree on the big IF part.