Weak Rupee or Strong Rupee

Unlike China, India has allowed its currency to appreciate by almost 13 % since January 2007. People from US might not have heard a lot about it (except those who outsource to India) because the trade between India and US is a pathetic 22 billion $ compared to 288 billion $ with china. But still Rupee appreciation is a very big story in India.
So what is going on? The Rupee exchange rate is neither completely fixed not floating but is ‘managed’ by RBI through selling or buying other currencies. Till April RBI was buying a lot of dollars to keep the currency fixed at 44 Rs. to one $ but with investor sentiment so hot on India that money pouring from abroad is already 12 billion $ till November as compared to 8 billion $ last year that the RBI found itself spending more and more on buying $ to keep the currency floating. But when inflation shot to 6% in April the govt. stopped buying $ and let the currency appreciate. The result – Rupee is 39.5 to a dollar.The stronger Rupee hurts exporter because it makes their products more expensive to overseas. The software companies are feeling the pinch and have reduced their profit forecast for the upcoming years (the tech companies which were once the favorites of the stock markets have lost its status nowadays). Indian news reports have also warned that the total Indian exports this year will be around 125 billion $ compared to the 160 billion $ it gave at the starting of the year and up to 275000 jobs might be lost for the same reason.
The stronger Rupee has reduced inflation but at what cost? The exports are dying and the imports are ballooning. Perhaps we should be more like china which keeps its currency pegged while the whole world cries. Textile exporters who operate on silk thin margin are already going into losses.
What might be the advantages of a stronger Rupee? Well a stronger Rupee will force the Indian companies to be more competitive and efficient especially since the Chinese currency will appreciate over the next couple of years. Also it will differentiate us from China and we will be seen as a fair global player. Overseas flights and travels will become cheaper and so will the imports of goods (some electronic goods such as television have already reduced their price by 10%). It will also help Indian firms to snap up overseas firms.
But one significant change that this Rupee appreciation has brought can be seen in the entrance fees at monuments like Taj Mahal, which traditionally offered a rupee rate to the locals and a higher dollar rate to the for foreigners. Now Govt. has stopped accepting dollars at national monuments because of their value in Rupee terms have dropped so much. Foreign Tourists will now have to pay the same way as Indian do : in Rupees.

Emulating China - the way out

I was wondering how China managed to keep its currency constant and here is my research on it.Discussing about china the current foreign exchange is 1.33 trillion $. India’s foreign exchange reserve currently is 206 billion $ (embarrassed smiley). The comparison is not to belittle India’s achievement but to highlight the China’s surge. (Recently there was an IPO of petroleum China whose market capitalization was more than the whole Indian GDP :-0)
I was quite surprised with my research. I earlier thought that China still has its currency pegged against the dollar but since 2005 yuan has been steadily appreciating against the popular currency ($). But before 2005 China had a simple policy which I would insist the Indian Govt. to follow as China is at least 20 years ahead of our country. In that case an Indian floating currency should be there only in the year 2025.
Let’s see how China rose to such great height (that it is now) using a simple weapon – fixed currency.
Here is the recipe : a large manufacturing facility and power to mobilize millions of people at that facility to produce everything. Everything and Anything here implies any damn thing that the foreign country needs. Be it Razors, batteries, haircombs to computers, lazer guided missiles (hope everyone knows where Pakistan got its nuclear carriers from). Once that is done mark the price as cheap as possible so that all the countries flock to your country to buy these things. You can have JVs with bigger companies so that any technical knowledge you lack can be filled up. Build huge SEZs (Special economic zones) and give tax benefits to all those big multinationals.This was simple..any communist country could do what China had done but that is not where the genius lies. The ingenuity of Chinese govt. was in keeping the yuan rate constant. It is obvious that when you are exporting so much outside you are bound to gather lots of foreign currency. At that time America was the biggest importer of Chinese goods (it still is – go to any store in US and the textiles, toiletries and toys will be from china). They exported so much to the USA that the currently the trade deficit between US and China stands at a staggering 238 billion $ (trade deficit means that China exports 238 billion $ worth goods to US more than the US does to china)
So what to do with the extra money that is pouring in the country. Had china did nothing about the inflow of money its currency would have appreciated and its good would have become non competitive (India would have jumped on the economic scenario sooner in that case). But it did exactly what a chess player would do when he is in a fix. It found a way out through spending that extra cash to buy foreign currency.Now that is a tricky job. How would someone buy foreign currency. It is not possible to go to some American exchange and buy thousands of billions worth of American dollars. So instead it started buying US govt. bonds and US stocks. The end result was that China kept profiting from its undervalued currency and US people had a false sense of security with its stocks rising

Also the Chinese economy had to run parallel to the US. It means the yuan interest rate has to be kept in tandem with the dollar interest rate so that when the dollar rises the yuan also rises and when it falls so does the yuan.
But something happened in 2005 which tried to turn the world economy. China announced that it is going to make its currency free floating (upto some extent). As you can see from the graph below (last 5 years) suddenly the Chinese yuan started appreciating

In comparison here is how the Indian Rupee fared against USD

As you can see from the graphs, Indian Govt. never had any plans in place to control the INR which does not bode well for Indian Economy and exporters.
Thus on the exchange rate side, Chinese policy has always been reactive to US policy. From a high of 1.5 yuan to a dollar in 1979, the yuan, falling steadily against the dollar, has been fixed at 8.28 to a dollar since 1995 and remained unchanged through the 1997 Asian financial crisis, the 1998 and 2000 US recessions when pressure to further devalue the yuan was resisted by China. And now it is relatively a free flowing currency but that is not due to the sudden conscience upheaval of the Chinese mind but because the threatening from the US to impose economic sanction on the country if it does not toe the global line. Surprisingly there is another lobby which moots for the Yuan to be kept undervalued as much as possible to sustain global commerce and they believe that an appreciating Yuan is dangerous to the health of the world (their point of view might take another mail to explain).
It is estimated that the Chinese currency is still undervalued by 40%
Indian Govt. has to adopt the Chinese policy if it wants a growth rate which can throw it into the Superpower league. India is currently a developing country and before the development phase gets over we need to make as much cash as we can (as the saying goes Make hay while the sun shines and the sun is surely shining). I think maintaining INR at this rate is the only method how we can stay competitive and I hope Govt. soon comes to its senses.

Subprime Mortagage Crisis - US is doomed

I am sure that you people have heard about the Subprime Mortgage Crisis of 2007 in US which is threatening to throw the country into a recession. But there is very little that we know in detail about this phenomena called subprime lending which when started promised to be a torchbearer policy of modern world economic reform.
Let us go into history and see what this Subprime lending is all about and does India face a similar Crisis as US or will it be affected by the US Recession.
Definition:
Subprime lending refers to the practice of making loans to borrowers who do not qualify for the market interest rates because of the problem with their credit history or the inability to prove that they have sufficient income to support the monthly payment of the loans which they are applying.Now since the lenders are taking a risk by lending loans to such people they also charge higher interest rates for these loans. Of course, such the lenders chose to tread such a path because of the greed of higher returns on the loans.
Subprime Loans were usually issued to finance mortgages and hence they were considered a boon as they increased the opportunities of homeownership. It added nine million households to the list of homeowners and catapulted US into the top tier of developed countries
But soon the ugly face of Subprime lending started showing up its face. When the borrower was not able to pay his loan installments on time the lenders levied a fine for late payment (which was of course more than that of a prime loan) which was added to the loan and thereby adding more load on the borrower. The borrower usually fell into a vicious never ending cycle and became a defaulter. In late 2006 the US subprime mortgage industry entered in what many observers refer to as meltdown. A steep rise in the rate of subprime mortgage foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, affecting the whole US economy.Are you finding it difficult to understand? Here is an example.
Tom and Wendy bought a sea facing home for 600,000$. Tom earned around 100,000$ per year and Wendy around 30,000$. Even though Tom had bad credit history the bank approved its loan (on higher interest rates). They moved in the house expecting the good times to last forever. Suddenly Tom lost his job this year and the monthly mortgage seemed too expensive. On top of it the price of the house declined to 500K $ so they decided to apply for foreclosure. (Hope this example makes it clear what is happening with millions of people in US)
But is that the only reason for the imminent danger of US recession? Well there are other reasons too..• Because of rising population, the US needs to create on average 120,000 additional jobs per month to keep the employment rate stable. But in August the US actually lost 4,000 jobs. This looks more a trend than a blip.• Predictions that the economy is going to slow down to only 1% this fiscal (the economy of US grew by 4.5% last fiscal)• Real estate prices have fallen down by almost 10% nationally (real estate prices have also fallen in India in metro cities although not nationally)• Rising fuel prices (the light crude oil reached a record 100 $ per barrel just yesterday)• Hidden costs for Iraq war coming out (1.5 trillion $ - that’s 20000 Us $ per house hold per anum!!!)
What are the implication for India..will the US recession affect india in a big way. I don’t think so. India is relatively cushioned against the US recession as it does not totally depend on exports to that country. The last time US faced recession was post 9/11 during which time Indian economy was on an upswing. Yes the IT companies might show a dip in profits so India is definitely going to get a chill from the US sneezes  Now US has ceased to be the sole locomotive of the world yet US accounts for a quarter of worlds GDP. So Indian GDP growth might fall from recent average 9% to 7% but still it is impressive.
Economist joke that a recession is when your neighbor loses his job and a depression is when you lose your job too. By that token a depression is not even on the horizon, let alone a devastating breakdown of economy. The good times will continue to roll in India, albeit a little slowly.