Rupee Exchange Rate Dynamics from 1993 to 2011: A Study of Factors Driving the Exchange Rate

Abstract: This paper attempts to study the factors driving the Rupee exchange rate and reasons for its sustained depreciation over the period since 1993. A statistical analysis is carried out to identify significant factors and regression models are developed to validate the assumptions. Solutions that can mitigate the depreciation of the Rupee are presented

Link to the full paper on IOSR Journal of Economics and Finance

Is Socialism bad?

I have been following the debate over the US Presidential elections off late, and the fight between the Republicans and Democrats has come down to Capitalism vs Socialism, with Bernie Sanders being the most vocal proponent of Socialism, along with Hillary Clinton and Donald Trump and the Republican candidates being the most vocal proponents of Capitalism.

I have not seen a lot of people talk of the virtues of Capitalism on the media so far but I have seen a lot many attacking Socialism. If you find main stream media talking of virtues of Capitalism, please feel free to correct me. 

To go to the definition of Socialism, I would refer to the book "The Audacity of Hope" by U.S. President Barack Obama where he states that socialism is derived from an idea of there being a social safety net, to protect people and businesses from failure. The Wall Street bailouts in 2009, TARP bailouts for businesses such as GM around the same time, the health insurance plan proposed by Obama and the US Social Security are all based on this Socialist ideal.

The arguments against Socialism are based on the model of Greece, Portugal , Italy and Spain - debt ridden economies of the EU that have run such high government deficits from socialist policies that the tax levels needed now are unbearable for the businesses to survive.

I think the fair question to ask is what is the fair value for the cost of social good derived from Socialism? Clearly the EU model is too expensive. It will be for the governments to decide where they tax their businesses, but one thing is for sure - Socialism is not bad and just needs to priced right to make it marketable to businesses.

IT delivers on productivity

I think this needs to be said now more than ever. In the global macro environment, where there is a lot of demand uncertainty owing to lack of macroeconomic stimulii from various central banks, businesses can still deliver on results through the use of technology in general and Information Technology in particular. I would like to talk a little about this topic here.

There are a number of case studies listed on the Nucleus Research web-site that study the Return on Investment for Information Technology based investments, a lot of which are free. Here is a reference to an interesting case study from Nuclear Research stating that investments in BI and Analytics can give up to 1300% ROI.

Here is a link to another interesting case study from Nucleus Research stating that investment in Google Apps based cloud IT infrastructure gave 830% ROI to 2nd WIND. 

You will find a number of other examples on the Nucleus Research web page describing how investments in IT have paid good dividends to some of the most competitive companies. Through the strategic use of IT, businesses can take their operations to the next level of performance and deliver results.

Where to find growth in the post QE era?

The market turmoil over the last few weeks has indicated that businesses are uncertain where they will see growth, now that the QE has ended in America and the interest rates are on the rise. The Chinese economy which had overheated, is now cooling off and the demand for oil, iron ore, copper and other commodities are dropping along with their prices. China is suffering from an over-capacity problem right now.

I think in this environment, the input costs for manufacturers would be very low since the price of oil is at an all time low and the price of copper and iron ore are also close to their all time lows. This should boost the margins for the manufacturers if their sales are constant. So all else being same, the manufacturers should be able to report better profits. 

But the demand side is weak as the consumer is not spending a lot of money. This is due to the fact that they are cautious in this uncertain environment. In this situation, lowering the prices could be a good solution to increase sales. Considering the low input prices, manufacturers of goods should be able to sell their goods at a much lower price now vis a vis one year ago. Price of oil has dropped from the $50-60 range in 2015 to $30 per barrel today.   Iron ore prices have dropped to a third of where they were one year ago.  Copper prices are down 8% year over year. 

There could be demand for commodities from building heavy infrastructure such as a rail road in Afghanistan or solar power farms in Sahara in Africa. India, which is facing a power deficit right now, is planning to build 5 new nuclear reactors in collaboration with the French. I think there are business opportunities and investing opportunities present today that could yield dividends going forward.

Happy New Year 2016!

2016 started with a bang as the Chinese markets crashed 7% before trading was suspended. You can find a good account of the opening day volatility in the markets in this blog post by Caroline Hyde, a correspondent for Bloomberg News.

The weak PMI data that came out just before the crash is just the straw that broke the camel's back. US tightening and anticipation of further rate hikes could be the prime mover here. China relies heavily on US consumption for manufacturing exports and the impact of the US rate hikes should have been felt in China much sooner. With further rate hikes slated in USA, there is no hope of a demand side stimulus. 

On the question of interest rate increases in USA, it seems USA is not yet ready for more interest rate increases. The biggest loser on the rate hikes could be the US government, which could see a rise in bond yields as demand for low return assets would reduce corresponding to the higher cost of capital in borrowing from the Fed. However the market uncertainty from the rate hikes is so high that the risk adjusted return from government bonds is still attractive, as was evident in last rate hike, when the government bond yields actually reduced. Link to related Bloomberg story.

China is sitting on another time bomb right now which is the state and municipal debt. The state and local governments are under increasing pressure to raise revenues to sustain their high debt levels, and the weak PMI data maybe an indicator that this may not be an easy job. Link to related Bloomberg story.

The Indian Identity by Amartya Sen

Just finished reading the essay titled “The Indian Identity” from the Argumentative Indian by Amartya Sen. I am trying to summarize the main ideas expressed in this essay here, to share them with you and get your views. In this essay Amartya Sen dives into Indian history to identify the roots of the Indian identity and various dilemmas faced in defining such an identity.

The question to be answered here is whether the Hindu identity and the Indian identity are separate or are they inseparable? On this, Sen is very clear that the Hindu identity is very distinct from the Indian identity. India has a pluralist and multi-religious population with Jews, Christians, Parsees and Muslims. Identity has to be chosen with reasoning and is not a matter of discovery. The Indian constitution is secular in nature and so one religion cannot be attributed to the Indian identity.

The Indian Identity has been one of integration of several cultures over a long period of time. Challenges to this have come from separatism within India particularly with the privileging of one community over the others and one cultural tradition over others. Indians have multiple identities based on their association with any specific community, language, religion or home country. There is varying relevance of different identities in different contexts and we have the choice to how much significance we attach to our different identities. However, there is no escape from reasoning just because the notion of identity has been invoked.

Global movements of ideas, people, goods and technology have tended to benefit progress and development in different regions. Sometimes the global movement of ideas is seen as the ideological imperialism of the West - as a one-sided movement that simply reflects an asymmetry of power which needs to be resisted.

Amartya Sen mentions that the Indian Institutes of Technology, which were launched at the initiative of Nehru have been critical at flowering information technology and related developments in India. These along with the Institutes of Management have brought many dividends and have certainly been instrumental in opening up new possibilities for Indians. The development of Indian school systems has also been extraordinary. If we are not able to seize the economic opportunities for the manufacture of simple products in a way that has happened in Japan, Korea, China and other countries in east Asia, not to mention the West, it is because of a neglect of basic education.

The real debate on globalization is ultimately not about efficiency of markets or about the importance of modern technology, but rather about the asymmetries of power, for which there is much less tolerance today than after the Second World War. Amartya Sen argues that India has to move to import substitution and then to export promotion to build economies such as those of South Korea and Taiwan.

India today faces many challenges in setting up advanced manufacturing industries in the sectors such as semiconductors and electronics, advanced transportation systems and energy systems such as smart grids, solar and nuclear power to achieve energy security. These challenges are very similar to those faced by Jamsetji Tata in setting up the first steel mills in this country in 1907. Jamsetji Tata wanted to have a flourishing iron and steel industry in India whence the British had not setup a single steel mill in this country in their entire rule. It was during the Swadeshi Movement in India that Dorabji Tata was able to gain enough financial support from Indians for construction of the first steel mills that started rolling out steel in 1911. We will need similar initiative today to achieve energy security in this country that imports more than half of its requirements of oil, gas and coal.

P.S. The British are the largest investors in the Indian economy today out of the G8 nations.

The Argumentative Indian by Amartya Sen

So I am reading this book right now and just finished reading the essay titled “The Reach of Reason.” In this essay Amartya Sen sets up a case for having an integrationist approach to studying Indian history wherein the role of the Mughals is as important as that of the rulers before them. However, what is concerning is that in the 22 page essay, there are about 4 pages describing the philosophies of Akbar and only 2 passing references made to Chanakya and his book Arthashastra. Chanakya’s economic theories have not been explained in the essay at all and Akbar’s philosophies and their relevance has been explained in great depth.

Part of this may arise from the reason that Amartya Sen believes Hindutva activists marginalize the minorities in this country and their voice is not heard. Amartya Sen gives examples of the Babri Masjid being demolished in Ayodhya due to references of Ayodhya being the kingdom of Ram and such other intolerance that is practised by many pseudo Hindutva activists in the country. And that is indeed a cause of concern as has been noted in the recent debates on intolerance in the country.

Based on what we learnt in school, the Hindu religion has been developed as an assimilation of the cultures of many kingdoms in India over a period of time. And such intolerance as is seen in the pseudo Hindutva activists in India today is against the idea of Hindusim.

As Amartya Sen notes, India was a predominantly Buddhist country during the reign of King Ashoka, who too adopted Buddhism eventually. Incidentally, there is no reference to the philosophies of Ashoka in the essay as well. And Ashoka is considered to be among the greatest rulers to have ruled India, along with Akbar.

Amartya Sen also tries to argue that many of these religious beliefs are inhibiting the use of reason and the reach of reason in the society.