Currency exchange rate, inflation, interest rates, real interest rates, GDP growth rate, Current Account Deficit, FDI, FII, remittances, foreign flows, QE, Quantitative Easing – words and jargons that have penetrated our consciousness thanks to the innumerable reports that flash on our news feed. We never quite understood the dry concepts of Economics at college – we are forced to learn and know better as they impact our lives and livelihood in so many invisible ways.
The forecast was a bit scary when I recently read about it in the papers – only recently we have sworn in a new Government with a strong majority, a wave of ‘feel-good’ sentiment has run awash in our Country and the markets have mostly cheered the changed scenario.At the time of Government formation around mid May 2014 the INR was at its strongest at 58.4 to the USD.And as we resume the march towards becoming a superpower, one does wonder why is there someone writing such pessimistic forecast for our currency? Why can’t the equation be 1 US $ = 50 INR by 2016?
Well it has a lot to do with the inflation in our market and the interest rate differential. In India we are used to placing Fixed Deposits with Banks that yield around 8 to 9 % interest per annum – in return terms that would be salivating but for the fact that inflation eats heavily into the value and post taxation often the return is negative. Contrast this with a market where interest rate is near 0 % and there is even a concept of negative interest rate. Obviously, other factors being equal, there is a bias for the exchange rate to depreciate between the two currencies to reflect this reality. Capital is indeed a precious and scarce resource for us.
And we are part of the global economy now and the trends therein including the prospects of interest rates moving up in the US in about a year’s time and dollar’s recent strength against other currencies also has a big impact of where we are headed.
We are told that inherently it need not be bad news as well – a depreciated currency helps us gain competitiveness for our exports and exports have to rock for us to meet the ambitious GDP growth numbers that are bandied about so freely.
But nothing is ever cast in stone – how a multitude of factors play out in the global arena will determine our fate. It is fascinating to watch all this unfold and one acutely appreciates the wisdom of Einstein’s quote,“The more I learn, the more I realize how much I don’t know.” May be ignorance is indeed a bliss and one was better off in not knowing these complexities. Sadly one can’t quite put the genie back into the bottle. We have to come to terms with the reality and hope for the best.