All through my childhood, there was one certainty. That the rupee would always fall against the dollar. This happened regularly, consistently from 1947 to 2001. Then from 2001 to 2011, for 10 years, the rupee-Dollar stayed flat staying within the 1 USD = 40-50 INR range. Now it seems that the trend has changed again. And I feel that the Rupee will continue falling against the dollar. To see why this is the case let’s analyse why the rupee consistently fell against the dollar from 1947-2001. Short answer, “Reserve bank of India printed many more new Rupees every year than the US Fed”. You all know the long answer. Better and bigger minds (Rajeev Srinivasan not included) have compiled reams on this topic.
The more interesting question is this, “What happened in between 2001-2010?” Short answer, “The RBI somehow printed less than the USFed.” But how did this happen? I remember 2005. Prices in India were 1/10th what they were in the U.S. I knew that the Indian rupee was severely undervalued vis-a-vis the dollar from a pure PPP perspective. as India was entering the global markets, the rupee was bound to rise against the dollar, or else prices in India were bound to rise to get closer to U.S. levels. After all Dollars were now beginning to flow into India. Well, the RBI continued it’s money printing shenanigans and prevented the rupee from appreciating against the dollars. There was the 6th pay comission that sent salaries of India’s government officials soaring. At the moment of this writing, the rupee is no longer undervalued. Prices in hyderabad, India are actually higher than those in Austin, TX, USA.
1. Petrol is cheaper in Austin. No surprise here.
2. Clothing is cheaper in Austin. Walmart will sell you an undershirt for $1.50. U/ndershirts in India now cause over $3. Malls in singapore are selling shirts at the same price as malls in India. Malls in austin are selling the same stuff at half the price as in either place.
3. Houses in India are way way more expensive than U.S. You can now get a big 3 bedroom house in Austin for $100,000. Try getting a the same house in Hyderabad for 54 lakh rupees.
4. Food in restaurants costs the same in hyderabad and austin
5. Hawker centers in singapore sell food for the same price as roadside dhabas in Hyderabad.
6. infact the only thing that is cheaper in hyderabad than in Austin is rent. Rents in hyderabad are still 25% of those in Austin.
Given this info, you can see what inflation has been like in India.
1. The Rupee is no longer undervalued vis-a-vis the USD even from a Nominal perspective. From a PPP perspective it is overvalued by atleast half.
2. From the trade deficit perspective it is still not undervalued. The U.S. trade deficit is around $1 Trillion. India’s deficit is $185 billion. Given the relative size of the economies, the trade deficit is the same proportion of the economy
3. From a resource perspective, a manufacturing perspective, a technology perspective the U.S. is far superior to India and has far superior prospects.
Given this, there are only two possibilities. Either the RBI can stop printing money and plunge india into a depression. Or continue printing and debase the currency. They will debase even compared to the USFed and that is saying a lot. They will take the second option. I’m willing to bet my life on it. At the end of the day governments are very predictable. The rupee will continue to fall. To the NRIs reading this. Don’t put your money into the NRE/NRI accounts that the indian government is offering. You will lose your shirts. And for the Indians earning their money in India. Buy Gold, buy Silver with half your monthly savings every month. There is literally no other way to protect your savings. Or else spend all your money on fine clothes and dining and vacations and have no savings. But to save money in rupees is tantamount to giving it away