Can India re-Value the Rupee?

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Can India re-Value the Rupee?

Postby vmshete » 19 Dec 2001 21:56

Can India re-Value the Rupee to say 1 New Rupee=10.50 Old Rupees? What Factors will be nessasary to make this re-Valuation?

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Re: Can India re-Value the Rupee?

Postby Raja Ram » 20 Dec 2001 10:15

I think this was done in Argentina quite sometime back by the previous Menem regime. They recalibirated their currency to USD equivalent as a drastic step to quell hyperinflation. <P>I do not know how well it succedeed. I don't think Argentina is any better now. <P>If this is attempted in India their is one benefit though. The government has to keep the proposal secret and then announce it one day that the rupee will be replaced with a new rupee at a presrcibed rate of exchange.All bank deposits will be converted to reflect the same. Guess what will happen to the "black money" held by some very powerful people :).<P>For this and other more prosaic economic reasons it may not be feasible. I am not an econmist so I cannot comment on any potential benefit by this move.

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Re: Can India re-Value the Rupee?

Postby vmshete » 20 Dec 2001 12:08

The introduction of Euro in Spain has lead to a shopping spree in Spain with people spending as much of their "underground" pisetas" before it becomes worthless. The introduction of the New Rupee could stop all the black market for the time being and also boost the economy as more of the white collar persons who want to spend their black money will go into a shopping spree just because they can't exchange their undeclared wealth in banks.

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Re: Can India re-Value the Rupee?

Postby Rahul Mehta » 20 Dec 2001 13:48

<BLOCKQUOTE><font size="1" face="Verdana, Arial">quote:</font><HR>Originally posted by vmshete:<BR>[Quote]New Rupee could stop all the black market for the time being and also boost the economy as more of the white collar persons who want to spend their black money will go into a shopping spree just because they can't exchange their undeclared wealth in banks.<HR></BLOCKQUOTE><P>A cheaper way will be to withdraw Rs 500 and Rs 1000 notes from ciculation. Much of the "black money" is stored in those big notes. <P>This way the poor men, who generally have smaller notes will not need to run to the banks.<P>But such mesures have limitations. It can work once or twice. If done several times, the black money will hoard gold or silver or land or dollars instead of rupees. This will create more damage.<P>Anyway, I will support the idea of issuing new rupee or "withdrawing" higher notes. It is certainly worth trying out once.<P>-Rahul Mehta

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Re: Can India re-Value the Rupee?

Postby Raja Ram » 20 Dec 2001 13:51

Speak of a coincidence!<P>Here is what has happened to Argentina which introduced a new peso with a one to one parity with the USD.<BR> <A HREF="http://timesofindia.indiatimes.com/articleshow.asp?art_ID=1553061127" TARGET=_blank>http://timesofindia.indiatimes.com/articleshow.asp?art_ID=1553061127</A> <P>Sobering thought. OTH Hong Kong has had a pegged currency with the USD and this has helped it stabilize the economy and weather the financial crisis which affected Asia last time. But bear in mind the two situations are very different, one is a pegged rate and the other a recalibrating of the currency.<P>From both cases, we can only infer a fundemental fact. If the underlying economy is not based on strong fundementals then such measures fizzle out as merely gimmicks.

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Re: Can India re-Value the Rupee?

Postby abhischekcc » 20 Dec 2001 15:33

<I>A cheaper way will be to withdraw Rs 500 and Rs 1000 notes from ciculation. Much of the "black money" is stored in those big notes.</I><P>IMHO, taking away Rs. 500 and 1000 notes will not cure the problem to any extent. People will still horde black money. Only the mode of storing the value of cash will change. People will shift to other things like gold, stocks, and property/realty.<BR>Of these three property is the least attractive, because it has the least liquidity, its ownership can be traced, and to cap everything, it is very visible to the taxmen.<BR>Stocks. Well , somewhat better in that it can be hidden, but its ownership can be easily fixed , if the papers are at hand. And its liquidity is not immediate. Hence it is also below gold, which comes out at top.<BR>Gold is the most attractive because its qualities are the closest to money. It is highly liquid, (ownership is) untracable, and can be hidden very easily.<P>Why I prefer that black money be hidden in paper and not the other three because they cause the market to become skewed.<P>If black money is hidden in property, it makes dwellings less affordable to people who really need it. <BR>If in stocks, then it causes bubbles like the Harshad Mehta, etc.<BR>Can you believe we have had three stock market scams in the last ten years, since the free market 'reforms' were started?<BR>And if money in stored in gold it causes more import of gold, which is bad for the BOP. IIRC, in 1999, we imported 700 tonnes of gold, whose value should be ~ $7 billion, and we take ~ $ 6 to 6.5 billion in loan. IOW, if we stop importing gold, our BOP will become positive in our favour. :cool:<P>I'd rather see the black money stored in paper, than in something useful.<P>Of course, my words don't mean that I support black money, just a pragmatic approach to handling the problems.

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Re: Can India re-Value the Rupee?

Postby vmshete » 20 Dec 2001 20:01

What are the logistics required for this introduction? Anyone can tell that with this introduction the GDP per person will fall drastically and also the huge cost of re-introduction of lower denomination coins like 1 and 2 paise will become inevitable. The money in Banks could be reduced drastically and with $1=say 4.78 New Rupee will the Indian economy become more expensive to invest in???

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Re: Can India re-Value the Rupee?

Postby George J » 20 Dec 2001 22:43

I dont get it..why do you need a "new" currency i.e notes for the new-rupee. Can you revalue the existing currency.<P>EG: If i have a Rs.100 with me with Gandhi's pic on it $2.09 (@ 47.7). If you wanna revalue the SAME note to 4.78. Then wont it still be a Rs.100 gandhi note but it be worth $20.92 now. <P>WHy do you need to introduce a new note or coins all together. If we can devalue the rupee in Manmohan Singh's era why cant we err up-value the same note?<P>Am i confusing myself or wot?<P>What will be the seigniorage of the new-rupee? I donno how many of you know, that its costs a lot to make money (literally). <P>We have only two currency note presses Nasik and Dewas. We have four coin mints: Mumbai, NOIDA, Hydrabad and Kolkatta. The coin mints were supposed to be modernized in 1996 but very little is known.<P>I believe India mints its coins in Ukeraine and some notes come from UK presses.

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Re: Can India re-Value the Rupee?

Postby vmshete » 20 Dec 2001 23:51

won't this cause lots of confusion? Also we have to print low dinomination coins and notes if the revaluation is done.

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Re: Can India re-Value the Rupee?

Postby Shalav » 21 Dec 2001 01:03

Question is why revalue at all!?!<P>revaluation AFAIK is only done in cases of hyperinflation. India is not facing such inflationary pressures.

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Re: Can India re-Value the Rupee?

Postby Sasi » 21 Dec 2001 13:11

What India needs is not revaluation of rupee but replacing old notes with new ones. I have seen people putting two or three pieces of one 5 rupee-note in a plastic bag.

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Re: Can India re-Value the Rupee?

Postby rajivg » 23 Dec 2001 09:59

A few years back, the Wall Street Journal had an article on its front page saying that the biggest threat to the Indian currency is that huge staple they put in it. It tends to rip most notes and only the skillful can remove the staple without destroying a few notes.

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Re: Can India re-Value the Rupee?

Postby Kuttan » 14 Jan 2002 03:31

I tried discussing this issue many moons back and was shouted down by the Economics Gurus who could not think beyond what they had memorized from their western textbooks. Fortunately most seem absent from this thread so perhaps my opinion can survive a little longer here. <p>I see no fundamental reason why the rupee cannot CREEP back up in value. I agree that all these stunts like withdrawing notes etc. only contribute to increased chaos and therefore less confidence in the currency - hardly the way to increase its fundamental value. <p>However, here are my arguments: <p>1. The continuous slide in the rupee is artificial and deliberate, and is controlled by massive Indian business lobbies who hold most of their wealth in phoren currency inside or outside India. They are basically increasing their own wealth without bound by buying up real Indian resources at ridiculously low prices. Initially these started as export lobbies demanding reduction in Indian costs so they could sell at a profit - but then they realized what a good deal this was. <p>2. Many experts argued that the above was all conspiracy theory. That was before we thought about the Harshad Mehta antics, the Bofors scandal, the $2500 coffin scandal, the tehelka tapes, and most recently the UTI scandal. Not to mention the collapse of the Asian and now the Argentine currencies. Believe it - currency manipulation does occur on a grand scale. <p>3. There is a simple reason for the rupee to go up, if the GOI decides it should go up. It is the currency of a stable, growing democracy. The interest rates inside India are a heck of a lot higher than those in the US. If you had invested $1000 converted to Indian rupees in a Non-Repatriable Cumulative Deposit at 19% interest 5 years ago, you would today have a lot more money than if you held that money in dollars in any bank certificate anywhere and tried to convert today. Even after honestly paying US taxes on the appreciation in real value every year. <p>If this fact sinks in, people should be rushing to buy rupees. The GOI should limit money supply and drive up demand. As the conversion value creeps up even by a very small percentage, the rate of gain shoots up - and so should demand. Again, if the supply is intelligently controlled, the rate of appreciation should rise. <p>The export lobbies who control the GOI will scream at this - which is why it will take one tough Finance Minister and Prime Minister to stay the course through this strategy. Or, we need the equivalent of a Federal Reserve Chairman with the powers to do what is best for India, regardless of political pressure. <p>That's all it will really take. As the rupee value creeps up, the net worth of our 1B people will rise accordingly. Technology imports will rise - but the buying power will remain in balance because people have to improve productivity to survive in the global economy. Quality will improve, because now there will be money to invest in buying phoren technology items to improve quality. <p>India will never look back. <p>Of course, this sounds Utopian, but I submit that today's conversion rate is totally bogus, and the artificial barriers of yesterday are gone. <p>My other argument was that in the age of the internet, barter could be used to drive up the value of the rupee to where it really should be. Just today I was checking prices of MRF cricket bats on the web. You can buy the same bat (MRF Genius - "the very same bat used by Sachin Tendulkar") for the equivalent of US$ 199 either from an American store, or from an Australian store. But you can also buy it in India for Rs.3300 - which is a lot less. The trouble is, you still can't ship it conveniently... <p>(the other trouble is that Sachin Tendulkar's bat ain't going to do much good in my hands.. but that's another story :( )<p>A superb multi-course meal for 4 in an Indian restaurant in Kerala costs maybe Rs. 1000. You can't come anywhere close in Atlanta for under $70 (I mean in an Indian restaurant) - and the taste still won't be anywhere nearly as good. <p>Food is pretty basic as a human necessity, and in my case as a reason to live. <p>OK, lets take "shelter". You can build a stone-and brick bungalow in prime urban land in a super town in Thrissur, 1 hour from an international airport, for Rs. 20 lakhs. A similar house would cost at least $250,000 in a US city, 1 hour from an international airport. <p>I could go on for a long time on this... but the point is, by simply being disciplined, shutting down the Devaluation Lobby, and pushing up demand and pulling down supply of the rupee, it is quite feasible today to get up to an exchange rate of, say, $1 = Rs. 10. <p>And if that kind of rise occurs over the long term, speculative buying would drive the conversion rate sky-high. $1 = Re. 1 is not out of the question in the next 20 years.

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Re: Can India re-Value the Rupee?

Postby Sridhar » 14 Jan 2002 07:49

No offences meant but an Aeronautics professor is best off talking about planes.

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Re: Can India re-Value the Rupee?

Postby member_128 » 14 Jan 2002 08:03

appreciatig th ruppee..<p>WHY? and WHATFOR?...<p>there is no hyperinflation..<p>the currentdeprciation of the ruppee is right and sound..<p>Playing with currencies is not a game

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Re: Can India re-Value the Rupee?

Postby bored_desi » 14 Jan 2002 10:42

Market decides what the valuation of a currency should. Revaluing a currency will only stick if the market believes in this. Instead of wasting political effort in this sort of crap the GOI would be better off to implement the second set of reforms
1) Freeing the real estate market
2) Removing restrictions on the labor market
3) Reforming the banking sector etc<p>Thats the only way the currency valuation can increase / decrease.

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Re: Can India re-Value the Rupee?

Postby Kuttan » 14 Jan 2002 18:23

<blockquote><font size="1" face="Verdana, Arial">quote:</font><hr>No offences meant but an Aeronautics professor is best off talking about planes. <hr></blockquote><p>Spoken like a true economist. Wasn't the Argentine Economic Recovery Plan of about 5 years ago developed by economics experts? <p>If aeronautical engineers used the same analytical and predictive philosophies, and sense of honesty and responsibility, that economists use, it would go like this: <p>"This plane may or may not take off or go underground, and if it takes off, it may go east, west, north or south, and may gain altitude or crash. Now that I've explored several scenarios, pay me a million bucks. After the event, please come back to me and I'll write a column explaining why what happened was what I predicted, and you can call me an expert". <p>I used to read the Donald Ratacjak column in the AJC until I figured out his predictive - explanatory model, above. It sounds so intelligent for those who have no attention span or long-term memory. <p>Arguing about "qualifications" and degree certificates is a heck of a lot easier than arguing about ideas. (No offence :) )

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Re: Can India re-Value the Rupee?

Postby Umrao » 14 Jan 2002 18:42

<blockquote><font size="1" face="Verdana, Arial">quote:</font><hr>Originally posted by Sridhar:
No offences meant but an Aeronautics professor is best off talking about planes.<hr></blockquote><p>The plain truth is that both palnes and economies are usually poised to take off but often crash.<p>Dont you see that economics is derivatives of Aeronautricks!!
consider the interchangebility of terminology<p>Plane takes off
Economy takes off
Plane Grounded
Economy grounded.
Taxi down
Taxing down
Plane lifts off
Economy lifts off
Plane turns south
Economy turns south
Plane hits turbulence
Economy runs into turbulence
Plane belly lands
Economy soft(lands) under belly.
Plane crashes
Economy crashes.<p> See there are so many similarities, if a plane can fly its only on the wings of economy. (These days they serve you pretzels in flight, on which you may choke like prez Bush) :D <p>
PS:
Dont under estimate the power of "A Beautiful Mind" of Narayanan. ;)

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Re: Can India re-Value the Rupee?

Postby Nandu » 14 Jan 2002 20:37

A currency note is a government obligation. Cancelling certain denominations, or "revaluing" the currency so as to eliminate the value of currency held by some people is, in a way, a defaulting of the sovereign obligation of the state.<p>India, when "Indira was India and India was Indira" did that once. I hope we never do it again.

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Re: Can India re-Value the Rupee?

Postby Umrao » 14 Jan 2002 20:52

<blockquote><font size="1" face="Verdana, Arial">quote:</font><hr>Originally posted by Nandu:
A currency note is a government obligation. Cancelling certain denominations, or "revaluing" the currency so as to eliminate the value of currency held by some people is, in a way, a defaulting of the sovereign obligation of the state.<p>India, when "Indira was India and India was Indira" did that once. I hope we never do it again.<hr></blockquote>
Devaluation is wrt to currency to which it is pegged such as Dollar, Pound Sterling.<p>India devalued under IG in 1966 due to IMF/World Bank pressure. At that time Rs was pegged to Pound Sterling and Gold Reserves (as Gold prices were relatively stable at that time)<p>The currency still remains what it was, such as a 1 Rs will still be a 1 Rs, a 10 Rs note still remains Rs 10, with "I promise to pay the bearer a sum of .. blah blah....".

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Re: Can India re-Value the Rupee?

Postby Sridhar » 14 Jan 2002 21:22

Narayanan:<p>Hope you did not take offence. I was only trying to add some humor. I am also not attempting to tear down your logic or give any views of my own.<p>As they say, economics can predict the future, as long as it has already happened.<p>Sridhar

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Re: Can India re-Value the Rupee?

Postby Kuttan » 15 Jan 2002 01:29

Hey! You are a lot more polite than the Economics "experts" that I ran into the last time - started reeling off stuff from Chapter XI of their textbooks. Unfortunately, none of them is taking the bait this time, or I could rub their noses in the dirt about their claims regarding the intrinsic value of yahoo.com stock, etc. <p>(at the time YHOO was trading at 1 YHOO = $491. Today 1 YHOO = $19.5)<p>The basic premise of my argument is that the continuing devaluation of Indian rupee is artificial, and is done by the manipulation of cynical interests who hold most of their money in phoren currency. <p>Once you buy this conspiracy theory, the rest of my thesis follows, Q.E.D. :D Now that even Colin Powell believes that there ARE such things as terrorists in Pakistan, I hope the Experts can believe that there is such a thing as currency manipulation. Look at every deal - UTI, State Bank, Indian Bank, Enron..

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Re: Can India re-Value the Rupee?

Postby Neshant » 15 Jan 2002 02:20

> Market decides what the valuation of a currency
> should. Revaluing a currency will only stick if
> the market believes in this. <p>Yes, this is 100% true. The market decides and you cannot con the market into thinking your currency is worth more than it is. Any attempt to con the market and artificially raise the value of the rupee (like govt buying its own currency and selling dollars) will be short lived. The market will respond by selling rupees and buying dollars until the rupee declines. <p>When Indian goods and services are in demand by the world, the currency's value will rise by itself.

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Re: Can India re-Value the Rupee?

Postby Sridhar » 15 Jan 2002 04:43

Let me attempt to clear up the mess here, without getting myself too dirty :) <p>There are several issues being simultaneously discussed and confused with each other. Here's my humble attempt to explain each, so that we know what it is that people here really want.<p>1. Redenomination : This refers to replacing a certain denomination of the currency with another. For instance, old 100 Rs. is equal to one new Re. There is only one reason to do it - convenience, done if the current currency is inconvenient in some way. For instance, the German Mark during Great Depression depreciated so much that they had to issue billion mark notes and even then, one had to carry wads of currency notes to buy bread. Or in India, we redenominated 4 annas into 25 naya paise. <p>Nothing changes with redenomination, since costs and salaries change at the same time. There are peripheral benefits in drawing out black money, but even this benefit is overstated. People figure out ways to launder their money, as past experience has shown. In addition, there is chaos for the first few weeks/months. Lot of currency has to be destroyed and hence there is a cost to this as well. Currently, our currency denomination is pretty convenient, thank you very much. Hence, there is no purpose to redenomination.<p>2. Revaluation (usually devaluation) - this is with respect to another currency or currencies. This is really relevant when the value of the currency is not decided in the market. Before the floating of the rupee, this was relevant, but not any longer. Technically, even the floating rupee can be devalued, but it has serious consequences to our monetary situation and is not to be taken lightly. While I am not aware of any significant revaluation upwards by any country, it makes sense only if the currency has been artificially devalued below its actual value. Hence, revaluation is also ruled out for our currency.<p>3. Pegging to a currency or a basket of currencies - Argentina did this and so did Malaysia. Our currency was also pegged to the pound sterling before independence. While there was no parity pricing, our currency was pegged to a basket of currencies before 1991, and RBI used to change the exchange rate every so often - weekly or even daily at times. No free-market economist would ever recommend this. It has some benefits though that are attractive to politicians (like in Argentina). It gives a shock therapy to massive inflation, without the tough management of the economy that would be otherwise required. As Argentina has demonstrated, if this option is used for prolonged periods, and without prudent management of the economy (as Malaysia seems to be doing), it can lead to disaster. We certainly don't need this.<p>Now, coming to the issue of the 'value' of the rupee. The only value we should be concerned with is what our earnings would buy. Yes, the exchange rate of the rupee was Rs. 10 to the dollar and is now Rs. 50 to the dollar. But what are the comparitive salaries in rupees (of an equivalent worker) then and now? I suspect that it would be more than 5 times for the same job. Also, in dollars, the salary would have remained about the same or increased a bit. An argument in this line is just like that of my grandmom - rice was only 2 annas a kilo then. But then the salary was only Rs. 15 a month!<p>While there may be some component of the value of the currency due to movements of black money and other manipulations, it is laughable to suggest that this is the only or even an important reason for the fall of the exchange rate. I explained the relation between the inflation rates, interest rates and currency exchange rates of two economies in a recent thread and hence will not attempt the stuff that is out of XIth Std. textbooks :) Suffice to say that while no theory can perfectly explain a complicated thing like exchange rates, it would be fairly accurate to say that a major reason for the fall in the exchange rate of the rupee is the higher inflation and interest rates in India compared to the US over all these years. That should not bother anybody since higher growth is generally accompanied by both higher inflation and higher interest rates.<p>The exchange rate of the Indian currency will continue to fall over the years. What is critical for us is to ensure that the value of each manhour worked keeps increasing (in terms of how much goods and services it can buy), whatever be the currency rate. In other words, the standard of living must go up, whether the exchange rate of the rupee is 1:1 or 1:100. And that is happening, at least since the early 1980s.

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Re: Can India re-Value the Rupee?

Postby Kuttan » 15 Jan 2002 05:29

O Guru: <p>What is the point in the salaries going up when the value of the currency keeps sliding down? Isn't this actually devaluing real goods and services produced by Indian workers, and cheating them, by paying them in lower-value rupees? i.e., not paying them as many dollars as they were promised? <p>This conversion-rate cheating is done for the benefit of the export lobby. Its like buying a cat from **** Whittington, promising an IOU of 1 shilling. The cat becomes famous by killing rats in America and the King of America gives the merchant 1000 dollars for the cat. Now the real exchange rate becomes: 1 shilling = 100 dollars minus costs of shipping cat across Atlantic and feeding it. <p>Merchant returns to London and deposits the dollars in the Banque de Suisse, and refuses to sell dollars to the English until conversion rate becomes 1 shilling = 1 dollar. So then merchant gives **** Whittington 1 shilling, spending only 1 dollar in the process. <p>This is basically what the Indian export lobby is doing - ripping off the poor workers who remain in India. A fat cat like NRIanan is not unduly bothered because 90% of holdings are in $$, but poor dear Sridhar whose money is 90% in Rupees gets burned by this continuous slide. <p> There is something deeply wrong with a nation whose financial whizzes say: "Its fine that my nation's currency keeps sliding in value every year, as long as my salary goes up faster than that". <p>There are very many workers and farmers who are not in a position to keep raising their prices to keep pace with this slide. <p>Example: <p>1. The skilled craftsman who makes jewelry in Thrissur. He charges only a small percentage of the price of the gold as labor charges - in 20 years I don't think his charges have changed a whole lot. <p>2. The tailor who does custom tailoring for a pittance. <p>3. The school teacher. <p>.. the list is endless. These people don't get paid in dollars. Hence they are being swindled by the currency thieves, with the happy acquiscence of India's misguided economics experts. <p>Had the rupee maintained parity with its position relative to the dollar since 1980, India would today be a far richer nation than the US. We've been robbed again.

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Re: Can India re-Value the Rupee?

Postby Abhijeet » 15 Jan 2002 05:45

In my opinion the rupee-to-dollar exchange rate has reduced (more rupees to one dollar) much faster than salaries in India at least in the last 3 years. According this website (http://www.indiaonestop.com/economy-macro-balance%20of%20payments.htm), the exchange rate was Rs.39.50 to the dollar in March 1998. It is about Rs.48 to the dollar now, a depreciation of over 20%. Obviously salaries in India have not increased proportionately (or what the heck am I doing here in the US? :D ). Possibly this is because the exchange is still coming down to an "equilibrium" level after being kept artificially high till 1991, but it is somewhat disconcerting to see how much more expensive trips to the U.S. are every few months.<p>Sridhar or anyone else who knows enough: could you explain (or provide a link to info on) how a currency is pegged to an external currency like the dollar? I kind of know what it means but I can't see how it makes any sense at all to arbitrarily to say that 1 Argentinian peso = x USD. I'd be very interested in learning more. Thanks.

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Re: Can India re-Value the Rupee?

Postby Sridhar » 15 Jan 2002 06:05

N:<p>Do you honestly believe that the tailor in Thrissur charges the same amount today as he did 20 years ago to stitch your shirt? If he did, he is certainly a loser, but I doubt he is. The school teacher has certainly seen his wages go up many times, thanks to the effect of the pay commission. Even the average farmer has seen his income go up, though it would have gone up more, if he had not been constrained by our restrictive agricultural markets. Our per capita real income in dollars has grown at about 3-4% in the last two decades and hence assuming that people have been cheated is incorrect. Yes, there may be individuals who have lost out and others who have gained a lot, but that is not because of the exchange rate. Let me reiterate, currency, exchange rates etc. are artificial constructs to facilitate economic activity. The key point is whether the tailor, stitching the same number of clothes in the same town is able to enjoy a better standard of living now than 20 years ago or not. Could he buy a TV then? Can he now? Could he ride a two wheeler around town then? Can he now? Could he afford to send his child to the English medium school? Can he now?<p>AbhijeetV: I don't claim to know much about economics, simply because I don't know much! You are right that there was an adjustment of the rupee in that period, which was because the rupee did not depreciate enough in the early 90s. Again, it was because of the rupee not being floated completely, particularly in the first half of the ninetees. Now, our foreign exchange trading has matured substantially and it can be said that the current exchange rate much more accurately reflects the market reality. <p>For pegging the currency, usually a new currency is created. Initially, an exchange rate is set up where old x no. of pesos would get one new peso. After this transition, akin to the Euro transition currently going on, the old currency ceases to exist. The pegging essentially means that if you took a peso to the Argentine central bank, they would be obliged to give a dollar in return.

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Re: Can India re-Value the Rupee?

Postby Div » 15 Jan 2002 07:00

An economist is a man who states the obvious in terms of the incomprehensible.<p>- Alfred A. Knopf<p>
Debt is the fatal disease of all republics, the first thing and the mightiest to undermine governments and corrupt the people.<p>- Phillips, Wendell

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Re: Can India re-Value the Rupee?

Postby Aditi » 15 Jan 2002 14:08

I desisted posting on this thread so far,but the exchange rate( pun intended)of views on the issue tempted me. There is this tale about an ad seeking an economist with only one handand another about an economist who, when confronted with the problem of cutting an apple,simply assumedthat there was a knife , :) . I have normally been at the receiving end of such bashing, but can now add a joke or two on the same lines with equal glee.<p>Sridhar has tried to explain the basic principles( ref Chapter xyz class XII textbook, :) quite proficiently. I would only add that the seemingly low returns that the labour gets in India as compared to the developed countries is not a fall out of the exchange rate. It is a pure matter of supply and demand and opportunity cost. In fact if under TRIPS, removal of restrictions on free movement of labour without boundaries can be negotiated,it would be to great advantage.

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Re: Can India re-Value the Rupee?

Postby Kuttan » 16 Jan 2002 17:12

Reading this thread has really filled some of those huge spaces between my ears where my education totally failed me - I had not read Chap. XI of "Economics for Dummies" yet. Thanks very much. <p>So now I understand a few things: <p>1. I should be happy that the Unit Value of the Mutual Fund where I have my life savings, has been sliding steadily downward for the past 2 years. (Note: Unit Value is the conversion from value per share of the mutual fund, to Amreekan dollars. - same as conversion from rupee (which is the unit value of the mutual fund where Indians hold all their wealth) to dollars. <p>This slide is a sign of progress, and I can certainly see signs: <p>a. The Manager of the Mutual Fund seems impeccably dressed - obviously one of the best customers of the "Haute Couture" or whatever they call it. S(he) definitely does not buy clothes at Wal Mart like I do. <p>b. The Mutual Fund broker drives a BMW 740i. <p>c. Joy of joys! The mutual fund reports a capital gain to the IRS on the transactions where the Fund Manager made commissions, and has given me even more shares in said Fund to represent those gains - though the unit value went down further when said "gain" was declared. So now I can have the joy of paying taxes on those "gains" from the little money I have stashed under my mattress. This is just like Indian workers getting pay raises each year - and getting into higher tax brackets and paying taxes - though their net worth in dollars goes down each year. <p>For example, in 1978, an airticket, one-way Madras - Atlanta, cost around Rs. 6000. Today, a ticket on a considerably smaller seat with less leg-room and even-ruder flight attendants, on the same airlines for the same trip would cost around Rs. 35,700, ASSUMING that you can buy a 1-way ticket for half the price of the cheapest round-trip ticket. Aviation Fuel costs are actually about the same or less (in 1978 dollars) as they were in 1978. <p>This obviously means that the average Indian's income has multiplied 6 times in that period. Wow!!<p>Gee, thanks!! Economics may not make sense to dummies like me, but it sure can make us happy!! :p

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Re: Can India re-Value the Rupee?

Postby Sridhar » 16 Jan 2002 17:57

There is zero economics in the logic about standard of living being the only metric to use. It is practical, down to earth reasoning. If you are unable or unwilling to understand it due to your hatred of economics, that's your choice :)

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Re: Can India re-Value the Rupee?

Postby kgoan » 16 Jan 2002 18:21

This is all very well, but the important thing is: What will be the new color scheme of our brand new notes, and whose picy will we put on them?<p>Come on people, lets raise the standard of debate on this thread and discuss these important issues.

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Re: Can India re-Value the Rupee?

Postby Kuttan » 17 Jan 2002 03:04

OK, Sridhar, so now you are saying that the standard of living of Indians has improved solely due to the continuous devaluation of the rupee. Not due to the huge investments in education made at the cost of hunger in the 1950s and '60s, the decision to reject PL480 Food Aid With Strings and learn to grow our own food, the decision to provide essentially free education even in the IITs, set up systems solely based on merit, invest in building heavy industries and protecting them until some minimal level of industrialization was reached. and the decision to conserve foreign exchange and not go deep into debt - so that we now have a huge positive balance of payments .. and the huge amounts of foreign currency and goods pumped in by hard-working NRIs... <p>.. all these are insignificant when compared to the policy of devaluing our currency? <p>Extrapolating this, when the rupee reaches $0.001 like my stock in NAHC, will India be a superpower of wealth? We'll need 18-wheelers to take along enough money to buy a week's worth of rice, sure...but then we'll be driving 18-wheelers, which is far more prestigious than driving Ambassador cars? :) <p>Following the same fundamental logic, if we let the Arabian Sea and the Bay of Bengal eat away at our beaches, our country should grow stronger and larger every year..<p>This is a very interesting debate. I am really learning so much. <p>kgoan: Of course the new currency should have the tricolor on it - the coins can have Advani's head on them so they shine more. The numbers should be printed both ways because George Fernandez tends to hold his speech notes upside down sometimes - like when he was reading the official statement about how the Atlantique was shot down.

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Re: Can India re-Value the Rupee?

Postby Sridhar » 17 Jan 2002 04:20

N:<p>You are an expert at debates and I usually defer to your superior knowledge. However, in this case, you are twisting my statements to prove that my argument is wrong.<p>Nowhere have I said that standard of living has gone up <B>because of</B> devaluation, rather it has gone up <B>in spite of</B> devaluation. To the contrary, <B>you</B> said that devaluation is cheating the people and making them poorer. The point I made (you can go back to my original posts) is that an hour of similar labor buys an average Indian a (slightly) better standard of living. For instance, I said<p> <blockquote><font size="1" face="Verdana, Arial">quote:</font><hr>The key point is whether the tailor, stitching the same number of clothes in the same town is able to enjoy a better standard of living now than 20 years ago or not<hr></blockquote><p>What part of that is hard to understand? Currency acts only as an intermediary to overcome the limitations of a barter system (where in effect effort of individuals was bartered for goods and services). Thus, my point is that the value of the currency is irrelevant as long as the goods and services that a person obtained for an equivalent amount of effort, without significantly changing his skill set, does not decrease. And I believe it has not. If anything, it has marginally increased.<p>Yes, over the decades, growth has come about due to productivity improvement (education, technology, skills, etc.). But it is not clear that without the gradual decline in the value of the rupee that we have seen, this growth would have been any greater. If anything, artificially keeping up the value of the rupee could have brought us disaster. Argentina is a recent example of what can happen if you keep the currency above the level that it would have been at, had market forces decided it.

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Re: Can India re-Value the Rupee?

Postby Rahul Mehta » 17 Jan 2002 04:48

Narayan, Narayan :) <p>Your view is that "secret individuals" (exporters etc etc) are at work who are devaluing rupee and hurting common men otherwise.<p>Now I dont agree with "giant-conspiracy" theory as such. But I have seen cases where 1000s of micro-conspiracy simultanelously, independent of each other, and the net effect is a giant-conspiracy against common men.<p>(Allow me define giant-conspiracy and micro-conspiracy. Giant-cons is where 1000s of men at top are woking togather to benefit themeselves in illegitimate ways and their acts hurt millions and crores of common men by a large amount. A micro-conspiracy is where 4-5 individuals at top work togather, and they hurt crores of individuals only by a few paisa. But the damages of lakhs of micro-conspiracy add up)<p>eg UTI. You pay money to a trustee/top-executive and UTI would buy crores of rupees of shares or leak some information about future buy/sell. So several transactions werepart of micro-conspiracies involving 1-2 trustees, 2-3 top-executives and 2-3 brokers or industrialists. But net effect was that UTI-invetors lost some 40% to 60% of their capital.<p>So Narayana, I have only one Q to you : what changes in EXSITING ADMINISTRATIVE PROCEDURES do you suggest to reduce the damage that these conspirators are creating? And how do propose we arrest and get these conspirators into VIP prisons?<p>-Rahul Mehta

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Re: Can India re-Value the Rupee?

Postby Kuttan » 17 Jan 2002 05:13

I agree about the mega-conspiracy - that its probably more than 2 or 3 people doing the manipulation. Actually it may be as simple as what jumrao or someone else pointed out - that in the 1970s, Indian businessmen who exported goods to Russia and got paid in rupees were allowed to convert those to dollars and deposit the money outside. <p>Basically, I think Indian businesspeople are selling rupees and buying dollars ASAP and depositing the money outside in some form or other. In the old days they would buy gold smuggled in from the Middle East, but now dollars have taken the place of gold. <p>For these people, it is win-win if the rupee gets steadiliy devalued - its like collecting interest on their Swiss numbered accounts, far more than the miserly Swiss bankers give. <p>Here I lose the thread - how exactly is pressure exerted on the Indian Reserve Bank, or whoever controls monetary policy, to keep printing new rupees and let the rupee value slide? Someone is <p>The economists here don't seem perturbed by this slide, but if you read the discussion above, it does what such discussions have always done - there is NO basic reason why the devaluation HAS to occur. OTOH (speaking like an economist here, Aditi..) devaluation does not seem to bother our economist friends - they seem to consider it to be an essential part of economic "growth". This is where I disagree strongly - it is NOT in India's interest for its currency to keep sliding. <p>As you see, Rahul, devaluation is good for those businessmen (and maybe politicians) who hold substantial assets outside India in phoren currency, but it is BAD for those whose assets are all in Indian rupees. I wish Tehelka would send some of its "agents" to investigate this scandal. <p>The UTI situation shows that insider trading is alive and well in India. Look at the ENRON story - the top executives cashed out in time, while the poor employees of ENRON were prohibited by company rules from selling their life-savings held as Enron shares. How can anyone believe that the Indian monetary system is immune to pressures from the same types of people? If I have converted, say, a a crore of rupees into dollars and stuck it in a phoren bank, and now I can get the rupee devalued by 10 percent within 6 months, that's like collecting 20 percent interest per annum. I can probably afford to pay a small "baksheesh" out of that to the guy who decided how many new banknotes should be printed, and how much to pay for foreign currency. <p>India needs a tough, independent Monetary Policy Department - completely immune from political pressure. Maybe they could get the former head of the Election Commission (Seshan?) to set this up, and hire the economics experts. Then give them the job of gradually raising the rupee value. <p>My point is also that in a free market, if the rupee value is seen to rise steadily over a few years, demand will rise and the rupee will become a standard - since many foreigners will buy it to protect their wealth.

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Re: Can India re-Value the Rupee?

Postby Sridhar » 17 Jan 2002 07:08

N:<p>Aha, let's go back to your logic of politicians wanting the rupee to go down so as to get a greater rupee value later. As a scientist, I would not rule out any hypothesis without any evidence (and even then only with a certain degree of confidence), but here is a counter logic.<p>Agreed that ill-gotten wealth stashed away in Dollars in a shady Carribean bank would give more rupees the next year, due to deflation of the currency. However, there are also earnings next year to worry about, which would fetch fewer dollars! And the years after that, at least till the next elections.<p>If the politician wants to maximize his wealth over the five year period, he(she) would want the value of the rupee to rise in the first half and fall in the second half. Making different assumptions on his earnings pattern (low initially when he is still finding his way, peaking sometime in the middle and slowing down again close to the next elections), the cutoff point (at which he wants the rupee to stop rising in value and start falling) would be different, but the pattern of initial increase and later decrease in value should hold. Even if the govt. was expected to last only one year, the same pattern should hold within that year.<p>Now, our politicians (and businessmen and other vested interests) are as smart as anybody in the world in maximizing their wealth (especially if it is ill-gotten) and hence they should have figured this out, shouldn't they? Why didn't we ever see such a pattern in the past? Care to guess?

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Re: Can India re-Value the Rupee?

Postby Rahul Mehta » 17 Jan 2002 08:37

<blockquote><font size="1" face="Verdana, Arial">quote:</font><hr>Originally posted by narayanan:
... Here I lose the thread - how exactly is pressure exerted on the Indian Reserve Bank, or whoever controls monetary policy, to keep printing new rupees and let the rupee value slide? Someone is <hr></blockquote><p>I have figured out this RBI part.<p>The RBI is believed is to be holy-cow, a non-corrupt body. Utter nonsense. The Directors, senior officers, experts etc of RBI are as corrupt as Directors/officers of PSU.<p>If you look at the list of Directors of RBI, you will see that many are "respected" members of business community. These Directors have rigid control over Directors and senior officers of Nationalized Banks (such as SBI, Dena Bank etc etc).<p>Basically, these directors and senior officers of RBI work as per their personal needs and needs of those who have assisted them to reach the top. Once again, there is no Mega-Conspiracy consiting of 100 executive and 100 businessmen. Each time, it is a micro-conspiracy consiting of 2-3 RBI-heads and 2-3 businessmen.<p>eg. Madgavpura Bank was giving lots of loans to Ketan Parekh to invest in shares. The loans were given with shares as collateral or sometimes without collateral. Now RBI had expressly prohibited Co-operative banks from giving loans against shares and giving loans without collateral. And those who were jealous of Ketan Parekh gave this information to RBI officers long long ago.<p>Despite detailed information, RBI Directors and officers did not take action against Madhopura. Bank. Why not? Look at the list of directors. Two are those whose shares were KP's favorite.<p>The root of most of the financial crimes in India is DELIBERATE lethargy of RBI.<p>So Narayan, given that RBI/UTI etc institutions are rotten down to bottom, what remedies do you suggest?<p>-Rahul Mehta<p>
-Rahul Mehta

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Re: Can India re-Value the Rupee?

Postby kgoan » 17 Jan 2002 10:58

>> Here I lose the thread - how exactly is pressure exerted on the Indian Reserve Bank, or whoever controls monetary policy, to keep printing new rupees and let the rupee value slide? Someone is <p>Well since people refuse to raise the tone of this thread and discuss the colour scheme etc. (except for a weak attempt by narayanan), I'm gonna stick my oar in:<p>Sadly, I know bugger all about economics. My theory is that it all started to go to pot when they allowed economics to be taught at universities. I mean, seriously, after that how can anyone argue against astrology or creationism, I'll never know.<p>At any rate, why the slide in the ruppee, well, and here I'm just copying from my "Economics for Dummies" (kinda oxymoron-ish doncha think?) book, it might have something to do with [url=http://www.odci.gov/cia/publications/factbook/geos/in.html#Econ]this!
[/url]
Scroll down to the bit that says "budget", notice something? Yep, tax take approx 44 billion, and expenditure approx 74 billion. Now, since I don't know much about economics, this might mean nothing and maybe the conspiracy theorists are right, OTOH, maybe this info is just a CIA plot, (it is their handbook after all).<p>At any rate, it points to the main culprit for the rupees slide, Yep it's the Government! No not, GoI, you know the world govt.. Those secret guys who actually run the world? It's THEM, I'm sure of it!!!

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Re: Can India re-Value the Rupee?

Postby Kuttan » 18 Jan 2002 04:30

Ouch!! That COULD be a problem, come to think of it - govt. spends 88 paise for every 44 paise that comes in taxes. <p>So who's printing the paise so happily with no control? <p>OTOH, I don't recall national budgets being in deficit by 100% - so is the government spending far beyond what is budgeted? I thought only the Kerala govt. did that - and they are broke now because they don't have a money-printing press. <p>BTW, the argument for the periodic up-and-down of rupee value is not correct, Sridhar. <p>An exporter/Swiss bank customer simply keeps converting rupees to dollars and taking the dollars out of the country. When the rupee value falls, his costs inside India fall, and he can sell at a greater profit. That's the other huge motivation for pushing the rupee value down, of course - buy India's products and services cheaper and make a bigger profit - but the profit does not come back in as Indian rupees, but gets converted to $$ outside. <p>Once the rupee starts sliding up, this whole system will have the slope reversed. <p>Remember during the UTI mess, it was revealed that some of the biggest investors in UTI and the Indian markets in general are foreign investors based in Mauritius. MAURITIUS? Economic Powerhouse? Or shelter for Indian businessmen hoarding foreign currency offshore? Think about it. Yes, there is a valid conspiracy theory.


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