[Economy] A story of Forex, currency conversion, rupee depreciation, inflation, subsidies etc.

Enter your email address

Once you subscribe,
you'll get my full articles
in your email for free!
See Below
The Number of readers
I already have!

Again in the fond memories of Dev Anand.
I’m writing this story so that the newcomers can get some idea about Forex, currency conversion, rupee depreciation, inflation, subsidies etc. (caution : full of technically not-so-correct examples, just to give you a broad idea of what ails Indian economy) Ok here it goes…..

Investor: Faith won and lost

Enter an American Mr.James. Thanks to American recession, he decides to invest outside USA, and comes to India with a bag full of green dollars, after he was assured by RBI and Commerce Secretary that environment in India is very conductive for business. Please come, give us your dollars, we convert it into rupees.
He (full of confidence) converts his dollars, at the rate of 1$=Rs.40
Now James searches for land to open office or factory somewhere near a big city in India. But price of land is so high thanks to the black money, it doesn’t make any sense buying a property.
He says ok, let me just ‘rent’ some readymade building and I’ll starting a small-scale i-phone production company.

But the electricity shuts down at random, for hours and days.
James: ok, I’ll buy a diesel generator like every other industrialist in this area.

Again price of Diesel also increasing, Profit margin shrinking.
Adding insult to the injury, his workers have gone on strike. Workers are demanding pay-rise because of the ever increasing prices of milk and petrol and James unable to settle the dispute so a lengthy (and expensive) legal battle is drawn. Meanwhile the factory remains closed for weeks and months together.

James: let me start a coffee house to pay lawyers' fees.


But the price of raw material (milk,sugar,gas) also increasing.
Add the bribe he has to pay to local goons, policemen, and municipality  corporators. If he raises the selling price of each cup, there will be drastic reduction in customers. Again Hardly any profit margin left.
Moreover frequently one political outfit or another, calls for a ‘strike/bandh’ for creation of separate state or to protest against inflation or corruption or lokpal or just because someone slapped their political leader.
James dares to open his shop on such 'Bandh day' and he is beaten up severely by the political goons, his coffeeshop is ransacked while police watches silently.

His calls his buddy Allen in America, cautions him not to invest in India.

Currency Speculations @ Forex Market

At the local beer-bar in California, Allen overhears some conversation between drunkards that soon IMF and world bank will give big financial aid to the ailing Greek and Portugal, and their economies will be back on right track. If one invests money at this point, in stock market or real-estate in those countries, he could get a handsome return of 40-50% a year.

Allen recalls a Bollywood movie he saw on youtube with English subtitles, the handicapped old-man in that movie had given a profound and universally applicable Management advice: “Lohaa garam hai maar do hathoda”
Allen immediately runs to Forex market, with his bag full of dollars to get them converted into Euro.

Crude Oil Bill

Curiously, Chairman of IOC (Indian oil corp.) is also waiting there @Forex market, with a suitcase full of rupees. He is in desperate need of dollar$ for King of Saudi doesn’t accept payment in Rupees for the crude oil sold.

IOC Chairman: dude got any dollars? Come on man. I need them, please.
Allen: How much?
IOC Chairman: You know the routine rate. 1$ for 40 rupees.
Allen: Hell NO!!! I ain’t selling. My best friend told me not to.
IOC Chairman: ok ok how about 45 rupees for a dollar.
Allen: Nope
IOC Chairman: 50
Allen:Nope
IOC Chairman: 52
Allen: ok, You got a deal.

The Solutions

Back in India

(upon knowing that at Forex market, Rupee is selling down at 1$=52Rs)
RBI Chief:  what in the god’s name is happening? 52 rupees for a dollar? How are we supposed to import crude-oil at this expensive rate?

Finance Minister (FM): hey look at the bright side, although our imports become costlier but now our exports will earn more money. It is Good for call-centres and textile exporters. And then they use that money for buying items in Indian market = it will create more demand= more jobs=boost in economy!!! Trickle down theory!!!

RBI: Wait a minute! Nobody is going to buy nothing under this high-inflation. So Whatever extra-profit the call centre owner makes thanks to this rupee devaluation, he’ll lock it in bank’s fixed deposit or pension funds and he’ll wait and watch for the prices to go down before making any big purchase. This trickle down theory isn’t that linear and straight forward as you’re thinking. Back to the point, We need dollars to finance the crude oil import..


Finance Minister: No problem. You’ve got more than 200 billion dollars Forex-reserve in your custody. Release them in the market.

RBI Chief: Never. I’m saving it for the rainy day. God forbid if situation gets even worse, we’d have our pockets totally empty. What if a war breaks out with Pakistan or China, how will we purchase extra-oil for our fighter-jets and combat-tanks during that crisis, if our Forex reserve is wasted like this?

Finance Minister: Damn it, if prices of petrol and diesel are increased because of this rupee depreciation, the truck-transportation cost will increase and so will the prices of milk,eggs,fruits and vegetables.  Spider-man's Uncle Ben before his untimely death, had said “With great power comes great responsibilities and for great Pawar comes great slappings” Please man, do something, we need green dollars to finance the oil bills. I’ve UP election to win.

RBI Chief: how about you stop MNREGA? That will stop a lot of corruption, black money generation and the resultant inflation and price rise.

FM:  You’re kidding, right? How am I supposed to win UP elections without MNREGA? Centrally sponsored welfare scheme is the only Brand-USP of our party!
RBI: Ok how about disinvestment? Sell a part of your shares from SAIL, Coal India and other public sector undertakings.
FM: Yes we can do that but wait Madam-ji and NAC (National advisory council) said the disinvestment money is to go in National Investment fund from which it’ll be spent for more schemes like MNREGA.
RBI: ok lets recover the 2G and CWG corruption money from Raja and Kalmadi then use it to finance the oil-bill.
FM: lolz, come on man, be serious. Hey wait…. how about you print 10 suitcases of rupees in your printing press. Then I goto Forex market and get them converted into dollars.
RBI: Yes that could work. Only problem is that the guy how buys these suitcases from you in exchange of dollars…. He might come back, buy all the onions and potatos from our market using same printed rupees and takes them to his home-country. That would lead to even further inflation for there will be lesser produce left in our market.
FM: no no UP election…no more inflation.
RBI: Look I understand your constrains but I can’t release dollars from my reserve. But How about you arrange for dollars .....you know something like via FDI? How about 51% FDI in retail, that ought to attract a lot foreign players with bags full of dollars, they’ll get desperate to convert it into rupees.
Finance Minister: hmm…interesting.

*-*-*-*-*

Related to this:

FDI in retail: The pro-con analysis

update 10 January 2012:

Story of Forex Part II Click me