Well it not looking good in future that what will be the roll of rupee in future as we looking the crises of pakistan and doller day by day going be expensive at rupee and rupee is going down instead of doller...,.
Jamal Mecklai / New Delhi November 13, 2003
Jamal Mecklai analyses the possible direction the rupee will take if predictions on India becoming an economic superpower come true
We are in the midst of a structural change in the global economy, which will, in the flash of an eye or a couple of decades (depending on your perspective), completely change the world pecking order.
Goldman Sachs, in its well-argued BRIC report, posits that China is likely to become the largest economy in the world (in dollar GDP terms) by 2040, and that India could be the third largest economy in the world in less than 30 years.
Many businessmen in India are buying into this “structural change” idea, and current action in both the equity and currency markets adds credence to the belief that India is, indeed, stepping up to a new wicket. Goldman Sachs’ report explains the thesis quite well:
“As developing economies grow, they have the potential to post higher growth rates as they catch up with the developed world…first…[because they] have less capital (per worker)…. Returns on capital are higher and a given investment rate results in higher growth in the capital stock…second is that developing countries may be able to use technologies available in more developed countries to ‘catch up’….
As countries develop, these forces fade and growth rates tend to slow…. In Japan and Germany, very rapid growth in the 1960s and 1970s gave way to more moderate growth in the 1980s and 1990s….”
I thought it would be useful — and timely — to try and provide some sort of numerical scale to this grand view. I put together a study that tries to estimate where the rupee could be if India’s evolution over the next 30 years or so followed that of Japan from the 1970s onwards.
To do this, I first tracked the correlation between the daily change in the rupee from May 21, 2002 (when the rupee hit its nadir of 49.05) to date (actually, October 16, 2003) and the daily change of the yen (over the same number of days) for different periods starting in January 1973 and running till December 1977. The period from May 1973 to November 1974 showed a very high correlation (over 82 per cent). Using this period as the starting point, I created two charts:
Assuming that the rupee goes forward (from October 2003), it would move identically with the yen’s movements from November 1974 onwards.
Assuming that the rupee’s volatility was only 25 per cent of the yen’s volatility from October 2003 to 2008, 50 per cent of the yen’s volatility till 2012, and moved as the yen did after that.
Neither of these traces are intended as forecasts — history never repeats itself exactly, and, in any case, there are questions as to whether the analogy between India today and Japan in 1974 is perfect, or even correct. However, the intention of this exercise is to point out the scale of change that can take place over long time horizons — after all, we have probably forgotten that as recently as 1960, Japan was considered a developing nation.
The darker line, which could be called the more “reasonable” trace, shows the rupee rising slowly to about Rs 40 (by 2007) and then moving between Rs 40 and Rs 50 for the next seven to eight years followed by a sharp appreciation to around Rs 20.
The lighter line — the more “frightening” one — shows the rupee actually weakening slightly over the next couple of years (to around Rs 46.50), then rising sharply to around Rs 30 against the dollar by 2007, and then moving between Rs 30 and Rs 40 till 2014.
Interestingly, both approaches show the rupee ranging between 15 and 25 over the past 10 years of the study — that is, after 2020 — which compares reasonably well with Goldman Sachs’ BRIC report that implies a real exchange rate of around Rs 20 against the dollar in 30 years.
While these are merely two of the infinite number of possible paths, some of which would have completely different profiles, it is interesting to explore the implications for the dollar globally.
The “reasonable” trace suggests that the rupee will not take off till 2014, while the “frightening” trace suggests that the rupee really starts to strengthen in a few years. Now, it is hard to imagine that the rupee could strengthen sharply without the dollar falling into a deep rut. Thus, the “reasonable” trace sees the dollar going into a swoon after about 10 years, while the “frightening” trace sees it happening much sooner — say, in a couple of years.
With the dollar already on the ropes against most currencies — and this, despite huge amounts of dollar support action by Asian central banks — there would likely be more bets on the dollar collapsing sooner rather than later.
Note, however, that the “frightening” trace projects status quo for a couple of years before the great collapse — in fact, the rupee actually weakens a bit (to Rs 46.50 by November 2004) — which is a good thing, since a collapsing dollar right now would rock the US economy, which is still far too important to the world’s exporters.
The status quo may even result in President George Bush getting re-elected. However, when the turn comes (according to the trace, sometime in early 2005), triggered, perhaps, by the final collapse of the untenable US position in the west Asia, the dollar will turn viciously downward.
Asian — and other currencies — will shoot up sharply higher, and, depending on how the world fares till then, the world may tip into yet another recession. India, which is not as hugely trade-dependent as most other countries, will obviously suffer less — in other words, will get a relative fillip in its global standing, explaining perhaps the grotesque outperformance of the currency (to Rs 30 in a few years).
Of course, all of this is just wondrous cocktail party speculation. As already mentioned, there could be a host of other possible paths and other forces that influence the future. For instance, the increased penetration and impact of technology today (compared to 1970) could actually accelerate the changes foretold by these forecasts. On the other hand, geopolitical calamity could slow things down.
But irrespective of the details of the future, it is clear that:
There will certainly be substantial two-way movements in the rupee over the next decade(s). This will require companies to develop a different level of focus on exchange rates. While historically, currency volatility has been largely a problem for profit and loss management, increasing globalisation (which means that more and more companies will have a larger fraction of assets as well as liabilities in foreign currencies) and the attendant large swings in the rupee’s value over long time horizons, will require companies to recognise the exchange rate as a key variable in strategic planning.
For example, decisions on where to locate a subsidiary, or, for that matter, whether to opt for a branch instead, will need to build in the possible risk to invested capital as a result of the rupee appreciation. Again, to protect against a sustained appreciation of the rupee, companies with significant foreign currency earnings would need to find ways to increase their foreign currency costs, either through borrowings or location of personnel off-shore or diversifying into import-intensive businesses or even taking on purely speculative short foreign currency positions.
Companies will need to develop more proactive treasuries, with skills in managing risk using both cash and derivative markets.
The Reserve Bank of India (RBI) will need to provide companies substantially more flexibility in using currency and derivative markets. For instance, companies need to be able to hedge the translation risk resulting from investments, profits of subsidiaries and so on, and the RBI needs to permit companies to enter into cash-settled transactions (whether in the cash or derivatives markets) for these purposes. In other words, the actual user (underlying exposure) constraint will need to be lifted, or at least modified, sooner rather than later.
The RBI will need to permit a wider range of players access to Indian markets to ensure that the markets, particularly the medium-term derivatives markets, are sufficiently liquid, which would result in a diversity of views and two-way markets. In other words, the capital account needs to be made more open — again, sooner rather than later.
Money won't buy happiness, but it will pay the salaries of a large research staff to study the problem.