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 Hundred Small Steps (Contd.): Market reforms within existing legal and institutional framework

First a comment on my previous blog post in this series: Creating Liquid and Efficient Markets

"Consider the last 2 weeks turmoil in the financial markets. On Aug 24 the markets dropped by around 1000 points as fears from slow down in China and the US rate increases created a flight to safety in the markets. As the money moved out of Indian equities, the Rupee dropped to a 12 month low to 67 to a US Dollar. Subsequently, as the rate hike fears in USA were eased and the Chinese government reduced the rates, the markets recovered and so did the Rupee to 65 to a US Dollar. Now suppose we had a robust and liquid corporate bond market open to foreign investors. The money that moved out of equities at the start of the down swing, would have moved into corporate bonds and the Rupee would not have been hit so hard."

The suggestions given in the section on market refoms have been alluded to in earlier sections of the report and so have been superficially covered in the previous blog posts in this series. I find the treatment in the report to be very complete and am unable to contribute to the suggestions expressed in any way. So I  would suggest the reader to read this section on the report on pages 133 to 135 here: A Hundred Small Steps: Raghuram Rajan

To be Keynesian or not.. That's the question.

The Keynesian Economics have come in for significant attacks from the right because of what has happened to Greece. I think that here things need to be clarified that America is not Greece and the Keynesian Economics of low rates and high borrowing by the government will, in fact, create sustainable growth. 

This could happen if the money is actually borrowed by the businesses that create the jobs in place of the government. And we are seeing that happen. If the government yield rates go up, the businesses will see less demand for their debt and this may not bid well for the economy. America has seen a large number of startups in technology and non-tech sectors and this is not to be seen in Greece. 

So it seems that the Keynesian economics are not to be blamed here. On the flip side, I do feel that a socialist government model wherein the center can take a more proactive role in the economy by building businesses and other projects such as railways would be better in the long run.