Insights from street children

A brief pause (or an interminable wait during peak hours) at a traffic light is a sure invitation to beggars and vendors in Indian cities. But this editorial from the Economist seem to have spun an insightful theory – how to contain the huge forex inflows into India – based on it. Excerpts -

“INDIA, it is fair to say, is not yet reconciled to the new-found strength of its currency. One poor wretch, pressed against the car window at a Delhi traffic light, tries to change a dollar bill she presumably cadged off a tourist. She wants 50 rupees for it. Alas, the dollar now fetches less than 40 rupees.

This vigour is due to a strong inflow of foreign capital, some of it enticed by India's promise, the rest disillusioned by the rich world's financial troubles. The net inflow amounted to almost $45 billion in the year to March, compared with $23.4 billion a year earlier.

The migration of capital from the rich world to the poorer one is a sign of a bleaker season to come in the world's biggest markets. This would, then, seem an inauspicious moment for India to bet its future on export-led growth. If it cannot resist the inflow of foreign capital, it should try instead to make room for it—by observing fiscal restraint—and to make the most of it—by investing it wisely. India may then have an economy worthy of a more expensive rupee; and its children may have better things to do than hang around at traffic lights trying to change a buck.”

Well said, The Economist…

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Samurai runs the Yen

Despite Japan's 2.6 percent growth and its trade surplus, the Yen is down 6.4 percent versus the dollar during the past 12 months. By contrast, the Thai baht is up 20 percent; the Philippine peso is up 14 percent; the Indian rupee is up 13.8 percent; and the ringgit is up 5.7 percent.

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Isn’t that strange? The common economic sense is that the currency of a country that has a trade surplus should be stronger than those having a deficit – unless it’s artificially kept depressed by its government like China does. Hence the global pressure on china to let Yuan fly loose. In that commotion, not many noticed what Japan has been upto.

William Pesek in his Bloomberg column, has explained it as he sees it.

"Anytime the Yen does rise, Japanese officials begin talking about “unnatural moves'' in markets. Then comes the “watching trends closely'' warning: In other words, “back off'' to anyone tempted to buy the Yen. Having raised verbal intervention to an art form, Japan no longer needs to intervene.

China, of course, does -- as evidenced by its more than $1.3 trillion of currency reserves. The difference is that China makes no bones about its desire for a competitive exchange rate; Japan disingenuously claims it lets market forces set the yen's value. If that's the case, Tokyo should just shut up and prove it. Then, China would have fewer excuses to hold down its own currency."

Dr.Y.V.Reddy can sure take a leaf – my IT portfolio could look a lot better.

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Bailout is for wimps

While the impact of Rupee appreciation is always arguable, the desirability and effectiveness of RBI intervention has become a moot point of debate.

The stronger Rupee buys more for less. Is that not an advantage? The inflation has come down from 6.7% (Jan 07) to 4.3% now. It is welcomed by bulk importers, acquirers of global companies and travelers. Those who raised forex loans earlier and are repaying now are delighted as less Rupees repay more dollars. Forego the advantage? We are net importers and it benefits the whole nation to have a stronger Rupee and that's preferable any day to a few IT exporters benefiting from weaker Rupee. The ones that worry are the Exporters of services including IT, textiles, processed food etc., the tribe which made a killing earlier when Rupee was the dog. They've had enough rain. Now let others soak it up.

Others argue that in India the correlation between stronger Rupee does not necessarily mean lower inflation. Our three principal imports are Crude, gems and jewellery and capital goods. While crude prices are administered, others don’t feature in inflation index. But crude prices were administered even while our Rupee was weaker and $/barrel was high. The administered pricing enabled us to pay less per litre of petrol - didn't it ? That's two-way street and it blunts the argument.

Look at those who clamor. They are the ones who get least hit - IT fellows that have 20% plus margin. They sit on huge cash cushions (built out of the earlier weaker Rupee days) in the balance sheet, have access to and can afford premium hedging tools like forward cover, currency swap etc., besides natural hedges presented by a multi-currency revenue streams from wider geographical distribution of businesses. Contrast them with some 65% of exporters that come from SME segment - that export at margins of 5-10%. Even a minor rise in Rupee wipes their entire profits out. But it’s the IT that clamors more.

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Frankly the question is not whether RBI should intervene. Ask "how effective will that intervention be" and "to whose benefit" in an increasingly flat world where volatility is the new atmosphere. Wake up and be nimble. Adjust swiftly to currency fluctuations. Asking for bail outs is for wimps.

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