Monday, October 11, 2010

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RBI’s Gambling on Dollar-Rupee Exchange Rate

It is well known how RBI (Reserve Bank of India) intervenes in the foreign exchange market and manipulates the currency exchange rates. What most of the analysts notice is that the rupee is pegged to the dollar and only allowed to become weaker with respect to the dollar and avoid getting stronger at any cost. But that is not exactly the case. The fact that all the RBI chairmen did the same things also points to things beyond RBI’s control.

So basically RBI is controlled by the power at the center which has been in control of UPA for many years. For all the time the Congress party was in control of the govt. in the history of India since Independence, the much noticeable mark apart from increasing poverty and population is the declining currency value. The idea of this party is not really to develop the country as it might seem, but to do a redistribution of wealth systematically from poor to rich by manipulation of Indian financial systems through complex ways that victimized poor man wouldn’t be able to understand. That’s what our Hon’ble Prime Minister’s so many academic degrees are for. They don’t do any damn good for the one Indian that does not understand how the financial system works or how RBI is manipulating their daily lives.

The current administration (of India) is very much known for its pro-western policies and so-called secularism (better said anti-Hindu). What it is not known for is that it is just another political party that works for its own gain like any other. No govt. sows the seeds for the so-called growth of India or whatever you call it. If the economic powers didn’t choose to outsource their work, there wouldn’t have been this “growth”. Weaker rupee is not necessarily the cause for outsourcing though it was the trigger. The flooding of investments during the last growth period was such that RBI couldn’t keep pegging rupee to dollar without taking huge losses. That’s when Rupee rose to <39 Rs/$. But on the dark side, when the recession started the powers continued to peg the currency rate whereby growth turned into “redistribution of wealth”. Fixed exchange rate essentially imported the recession (or better said “outsourced”) into the country. The fleeing of investments away from India was so strong that rupee became very weak to cross above 51 Rs/$. All this happened so fast.
(Image Copyrighted @ Yahoo! India Finance used under fair use for illustration)

Recent trend in currency exchange rate (rupee vs. dollar) makes us wonder if RBI has reversed its policy. But I don’t think so. Although an appreciating rupee is very helpful for a poverty stricken country and only bad for exporting Industry, I doubt that it is has reversed its trend. I feel that it is just another game played by the control of the govt. on RBI to meet their ends only. It may be to meet the needs of some entity that the powers in control are obligated/willing to help like they did earlier for the exporting Industry by depreciating currency value.

Rupee has been appreciating against dollar all through the month of September:

(Image Copyrighted @ Yahoo! India Finance used under fair use for illustration)

I have noticed enough trends in the past and the change of RBI chairman didn’t make any difference either. It does not matter whether it was a Rao or a Reddy. The RBI chairman is at best a puppet much like the mutual fund manager who can’t make his/her portfolios perform better than the market Index. I don’t like any gambling of RBI with exchange rates. This makes things worse to those who learned the trend and just started to adapt to that. Stock trading is not simple just for the same reason that trends keep changing.

Update on 18 Dec. 2011:
Now after a year since posting this, I see lot of popularity for this post as Rupee has depreciated to its all time low. Talk to me about growth.. where is growth when the currency is at its historic lows? Who the heck is really growing? In the name of growth all we have is a manipulation of money flow between rich and the poor in a transient phase (with time) that initially it appears to be a growth which eventually gets UNDONE with record levels of inflation. Yesterday we imported IT jobs, now we are importing recession & inflation. The inequality of income keeps growing by the day and after a TIME we will realize what in the name of growth happened is essentially a redistribution of wealth. And in the most sophisticated ways. That's what you get if you elect people who pose as highly educated with lot of degrees to show for. You won't even know what the heck is going on till it gets worse unless you too follow the economy regularly.

(Image Copyrighted @ Yahoo! India Finance used under fair use for illustration)

Fate of Rupee: depreciates faster and by a larger amount but appreciates as if somebody stops it at 44!
(Image Copyrighted @ Yahoo! India Finance used under fair use for illustration)

And one more important thing to note is that during the greatest bull market period 2004-2007 our currency INR was continuously going up. I remember as I used to read the forex weekly update on Saturday in Economic Times. Then RBI used to intervene in a process called sterilization and limit its rise. It would have easily gone to a peak of INR25/$ instead of just INR39/$. Well it deserved that for giving a growth rate of atleast 8% when US economy is at only 2% growth. RBI which is in control of Finance ministry had intervened to control its rise instead of letting the free markets to take care but this year as INR is reaching its historic lows they say RBI won't intervene, let the free markets decide. Hell! Free market will take it easily to INR 80/$ in no time. On bad days when foreign investors withdraw money it declines by 1.5 to 2 rupees per dollar. How many such bad days does it need to reach 100/$?

With the rupee at its all time low (and that too despite the fact that dollar kept falling during last two years which is why gold is rising), did we lose all the foreign investment in the country or did we import too much? There is still more withdrawals to come. The bad times seem to have just started. I used to think things will only get better before they get worse. Looks like the best part is over. The future is no longer about recession. Welcome to 21st century - Super Inflation period.

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