Impact Of Rupee Exchange Rate On Business Opportunities In India

We published a research paper titled "Impact Of Rupee Exchange Rate On Business Opportunities In India" in the IOSR Journal of Economics and Finance and the paper can be accessed here: Link to the journal

In this paper, we have presented the impact of Rupee exchange rate on business opportunities in India from a macro economic perspective considering the indicators such as Consumer Price Inflation, Gross Domestic Product and Index Of Industrial Production.

Abstract: In this paper, we present an analysis of the macro economy in India with respect to the exchange rate of the Rupee and de regulation of oil prices. These 2 factors have been critical in deciding the business competitiveness of the economy and their individual effects are studied. Various business competencies arising from strong and weak Rupee as well as de-regulated prices of oil are discussed. 

In continuation with the analysis expressed in this paper, we would like to share the following analysis:

The Rupee exchange rate in India is linked to the trade deficit (imports - exports). Higher trade deficits lead to a weaker Rupee. Considering an economy which has certain total imports x and certain total exports y, if the exports start dropping and imports (of consumer goods) start increasing, it might be a cause of concern (on the competitiveness of the economy). A currency depreciation might boost the exports in the short run, by making them cheaper. 

But consider the case of India. Here the primary imports are all in energy: oil, natural gas and coal. When the imports increase, we are importing more energy, and that is because the economy is doing well  and we are producing and selling more (domestically and internationally). In this case, should the Rupee depreciate with increased imports? Think about it.

(Petroleum accounts for 34% of India's imports. Data source at tradingeconomics.com)

On another note, Japan manages to import energy (oil) to meet 42% of its energy needs, but does not see any inflation even if the Yen depreciates from 75 to a US Dollar to 100 to a US Dollar. This is not the case with India. As is evident from the above research paper, a depreciation of the Rupee vs US Dollar will lead to higher inflation in the country (data from 2010 to 2014).

The below graph shows the energy imports in India as a percent of total (Data from: tradingeconomics.com)

source: tradingeconomics.com

A Japanese Decade for China

There are many parallels between yesterday's Chinese equity market crash and the Japanese equity market crash of 1990. The Japanese crash in 1990 was led by a crash in real estate prices and the same happened in China almost a year ago, following which Chinese government started an aggressive stimulus. Read full details here:  These 5 charts link the Chinese stock market crash to problems in property. Source: WEF   The market patterns too are exactly identical for both the crashes as can be seen in the attached figure.

Details of the Japanese market crash can be found on Wikipedia here: Japanese Asset Price Bubble  Reports on the Chinese market crash are available here: Chinese stocks plunge to a 3 month low 

China and Japan are both industrial economies dominated by the exports sector. Leading into the crash, both the economies were being driven largely by exports of manufactured goods. The demographic trends in Japan and China are also very identical because of the fact that they are pretty closed economies with respect to immigration and the population ages are tending to increase. In China this is partly due to the one child policy of the government.

Given the identical demographic, economic and financial trends, it seems as if China is headed towards the Japanese Lost Decade of the 1990s. The equity markets did not give any net returns over the 1990s in Japan and the economy was plagued with deflation and lowering corporate profits. Only the Japanese export powerhouses were able to grow in this period. Details of this are also available on the previously shared Wikipedia link. Many efforts were made to revive the economy and produce inflation and growth and they all failed.

This changed with the economic policies of Shinzo Abe, popularly known as Abenomics. He introduced a quantitative easing program and starting injecting money into the system through government and corporate bonds. This rapidly devalued the Yen and started increasing the demand, leading to the first recorded inflation of prices since the crash of 1990. The Japanese stock markets too have been seeing a rising trend since Abenomics have started.

In light of this, I think China can draw a number of valuable lessons from the policies of Shinzo Abe in Japan. Here are few articles on the same:

Investing in Japan: The Impact of Abenomics

What the 1990 Japanese stock market crash can teach us about the Chinese stock market crash

If history is a lesson, the future for China can be different from that for Japan.