This blog post is a repeat from a blog I made around one year ago, on an older blog which can be found here: http://niravdesai1209.wordpress.com/ The blog was titled "Can the Rupee drop below 60 to a US Dollar in a sustainable manner?"
Firstly, the Rupee is slipping due to the widening Current Account Deficit (CAD). Foreign fund inflows into financial markets and goods and services exports are the 2 main factors contributing to a stronger Rupee and import of oil, gas and coal is the main factor contributing to the weakening of Rupee.
As the Rupee weakens, the imports of oil, gas and coal become more expensive and alternative energy sources such as wind, solar and nuclear power become more economically attractively. Moreover, wind and solar power have 0 operating costs and are not affected by inflation at all.
Back in 2013, TATA Power was able to sell coal power from its Mundra Plant at 2.5 rupees per unit. Solar power was priced at 7 Rupees per unit, subsidies brought it down to 5.5 Rupees per unit. Wind power was priced at 4 Rupees per unit or less on average.
Rapidly increasing solar cell efficiencies and system design improvements have brought the price of solar power to Rs. 5 per unit in March 2014.
Now if we factor in a 5% inflation and a rising price of imported coal (which is about 60% of total coal consumed in India), in another 1 year with the Rupee at 61-62 to a US Dollar, solar and wind power will be cheaper than coal and natural gas in India. This will reduce the demand for imported coal and the Rupee may stabilize at around 61-62 to a US Dollar.
In a free market economy, where the most cost effective power source is used, it is hard to drive the Rupee below 61-62 to a US Dollar in a sustainable manner. I don't see that happening.
What are your thoughts?
Here is the chart from the IEEFA document corroborating my claims:
Presentation prepared on SAP LUMIRA with data from Government report on the Energy Industry in India which can be found here: Energy Statistics 2013
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