Go Dollar Go ......

Indian rupees is gaining ground with each passing fortnight and I am scared. But why the hell am I scared? Isn't your national currency getting stronger against US $ not a good sign. No, no for heaven's sake. Let dollar be where it is and vice versa. But ain't I kidding myself. Is it so simple. Has it remained so simple.

Any currency gaining against US $ appreciably is never a good sign. Why? Well for the simple reason that it impacts the whole economy. And how is that. Well lets take a short example. Ruppes was trading at around 44 per dollar some three months back. Today it is trading at around 40.70. This means that companies are loosing nearly 10% of their revenue for every dollar of exports. To put it simply $100 of export three months back would have earned Rs 4400, whereas now it would earn only Rs 4070 that is a loss of around Rs 330. But does a stronger rupee doesn't mean that imports will be cheaper. And especially in a country like India with a negative trade balance (when imports are more than exports) wouldn't it benefit more. I think even that is true.

The dynamics of todays economics are not restricted to only trade balances. It has gone far beyond that. With stock market and currency market gaining prominence in the flows of foreign currency, it is no more only how much a country imports that matters. What matters is the bottom line of the companies like IT giants who drive the sentiments across. This is an industry that has typically taken Indian economics to a zooming path. With dollar weaking, the greatest impact is to the bottomline of these companies which affect the overall sentiments. Beyond the IT giants lets look at another example of small scale industries this time like the textile industry which relies heavily on exports and supports five people directly and around two people indirectly. With loss in revenue due to weakening dollar this vulnerable industry is at the peril of annihilation. Well that's not a good sign for sure.

Thats the internal dynamics. But who is driving the rupees so strong. Hey what about the FDIs. Will they invest less or more with a strong rupee sensation. Lets again take the same example of $100 in stocks of company A of Rs 10 each. Lets assume that the stock appreciated by 10% in 3 months. Well three months back the investment would have resulted in 440 shares. Three months later he would take back $119 against $110 had rupee stayed at the same level. Thus a phenomenal gain of additional 9% purely due to exchange rate fluctuation. Thus you can expect to have more FDI with stronger rupees. Does it answer my question. I think somewhat it does. Ofcourse there are hundreds of other reasons for $ weakening and Rs gaining but this piece is really not to discuss economics. Is it? Note: $ 27.3 bn of capital inflow was witnessed during the last fiscal yr (only 11 months data) of which $ 17.1 were in FDI (62%).

Thus my whole submission is that gone are the days when the trade balances decided the level of exchange rates. The dynamics has changed over the period. Besides traditional mechanisms, stock market, FII, FDI and global sentiments all plays their own sweet little part in a free market era as to which direction the currency moves. RBI has been trying and would continue to do so but as we move towards a fully convertible currency regime we can look to more heart breaks and joys. Boy! the game has just begun.

And for yours truly who has been saving that addtional dollar so that he can have his pocket full when he returns to India, well this is a sad story.