One dollar is 64.55 rupees as of yesterday but feels like 100
Having earned my salary and remuneration in dollars since 1986, right until 1998, even when I was in India,the rupee-dollar valuation has been part of my personal finances for close to 30 years now. It is from this standpoint that I view the current nervousness over the falling rupee with incomprehension.
The rupee has generally been falling against the dollar for as long the two currencies have had a relationship, although in the early years the fluctuation was rather minimum. Figures about the historical rupee-dollar exchange rate drawn from the Reserve Bank of India (RBI) bear that out. In 1970-71 the rupee averaged at 7.5 against the dollar and throughout that decade it never went beyond 8.9. It was during the decade of the 1980s when the rupee began to perceptibly weaken against the dollar. While in 1981 and 1982 it still managed to stay below 10 (8.9 and 9.6 respectively), it crossed the 10 mark 1983-84 and has never really recovered in a very significant way.
In the 1980s, it doubled from the yearend value of 9.3 in 1981to 19.6 in 1990 end. It was in the much referenced 1991 period that the Indian currency took a swift kick in its vitals, beginning the decade with 31.22 and ending it in 2000 at 46.64. I was, of course, in New Delhi when the rupee precipitously fell from from 19.6 to 31.22 in a matter of weeks between the end of 1990 and the beginning of 1991. With more than half of my salary coming in dollars, I received a wholly undeserved windfall in my monthly remuneration. To watch my salary nearly double in a few weeks did register and register rather well.
In 1991, I remember walking into what then was an upscale haberdashery in Delhi’s South Extension area and buying a dozen shirts of an expensive brand in a dozen colors in about two minutes. I remember having paid close to 5000 rupees in cash for the purchase and leaving the store without bothering to either take the receipt or change. Since I was earning in dollars at a time when the foreign exchange reserves were dwindling I chose to treat my job as a duty of national importance. In my defense, I used to buy my clothes with that reckless abandon even when I did not earn in dollars.
To return from my digression, reading Paul Krugman’s quick take on the falling rupee story in The New York Times, it strikes me that it struck me a while ago what has just struck him; namely the question why the current panic over the decline in the rupee value. He thinks that the depreciation does not “look like as big a deal as some headlines are suggesting.” He then wonders, “What am I missing?” I will tell you what he is missing. He missing the knee-jerkness (not a word) of many of India’s talking heads. To be sure, there is a problem with the Indian economy that needs urgent fixing but then there have always been problems with the Indian economy that needed urgent fixing. That is what economies are about. They always need fixing all the time.
The way the US Federal Reserve has gone about fixing its own problems since June, 2008, is through a charmingly christened government intervention measure called Quantitative Easing (QE). Under QE the Feds buy bonds from its member banks. The idea is to lower the interest rate in order to stir up economic growth. The money for this purchase, which is known as expanding the monetary policy, is created by literally printing more of it. There are those who believe that the various phases of QE since 2008 (We are in its third phase since September, 2012) freed up liquidity and allowed capital to flow to markets such as India. Now that the US Federal Reserve is preparing to “taper”, meaning reduce and possibly end QE, it is having an adverse impact on capital flow to markets such as India. Dr. Krugman does not think QE has much to do with the rupee panic but that may be because he does not think there is any real need for the rupee panic as yet.
Looking at various figures, it appears to me that even with QE in place since June, 2008, the Indian rupee has dwindled from 39.26 that month to 65.56 yesterday in India. It did recover to 64.55 at the end of the trading day.
I agree with the Nobel Prize winning economist for the simple reason that I do not fully comprehend the whole system of currency valuation. However, I know enough to generally say that it began as an arbitrary system which has over the decades acquired some measure of sanctity by not being challenged and ridiculed enough by countries around the world.
According to a Reuters report: “In an ominous sign for Asia’s worst-performing currency this year, overseas investors, who had been net buyers of Indian stocks so far in 2013, headed for the exits this week, selling a net amount of more than $700 million worth of shares in the five sessions through Thursday.
Foreigners have also sold a net amount of nearly $1 billion of Indian government and corporate bonds so far this month.”
My takeaway from this would be to yet again recognize the fickle greed that runs the global financial system. There is no great mystery here. People just want their money to make more money in perpetuity.