China, Economics, Finance, General ramblings, India, Life, Thoughts

Another Post on the Dollar-Rupee Race

Enough talking about the advantages and disadvantages of getting a self-hosted blog. Let’s move on to some news that I’ve been reading recently!

One of the biggest questions these days is whether US will slip into recession. The Fed has been cutting rates since the last two months. This should help the economy in the sense that it will encourage more lending, which in turn will encourage investment, and hopefully, the economy will pick up in the long run. A weaker currency is good for US in a way because this will spike the export levels and might help reduce the ever-growing trade deficit.

Of course, we can’t forget the effect of a weak currency on the inflation (which will rise) and the energy costs. Right now, I’m paying $2.89 for a gallon, which is quite cheap compared to other parts of the country, where most of them are paying more than $3 per gallon.

There are lots of speculations and people are of the opinion that the dollar will depreciate even further and hit an all time low somewhere in the middle of 2008…and then the supply of dollar will (and already is) increase and the demand will (and already is) decreasing. The currency will finally reach a state of equilibrium sometime early 2009 and everything will be fine and dandy. There are some “upshots” about the weak dollar, like this article from Business Week mentions-

A weaker dollar also can help employment, as multinational companies choose to hire relatively cheaper workers in the U.S. Investors are also more likely to look for bargains in the relatively cheap U.S.

When we talk about the “relatively cheaper workers”, how can we not talk about the Indian Economy? ) My analysis closely aligns with Basab Pradhan’s thinking in this regard. Like he mentions, the industry that is “in the eye of the storm” is the Financial Services Industry and “most Indian services companies get 30 to 40% of their revenue from the Financial Services industry”. The second point he makes is that the stakes are much larger. Around $70 billion of losses have become public until now, and like Goldman Sachs predicts, the losses could cross $300 billion! Surely, India will get affected? There are very few companies that don’t have large off shore projects in India. So, how exactly can we say that India won’t be affected? A weaker dollar will erode the profit margin of these multinational companies. Anyone who has some knowledge of the method of translation costs can comprehend the effect. A company functions to add value to the share holders and indirectly to show good numbers in the financial statements. If that won’t happen, then shouldn’t the strategy change?

There is a report saying that Germany is already expecting a slower growth in 2008, thanks to the US subprime mortgage scene and the increase in the minimum wages. Victoria Ho, in her article “Asia Unhampered by Shaky U.S Economy” quotes Ravi Shankar Pandey, a senior market analyst-

“A substantial portion of Asian IT investments will be new investments and will come from organizations scaling up their IT systems or building entirely new ones to drive business.”

I don’t buy this statement. Who are these organizations who are scaling up their IT systems? I haven’t read anything of this sort in the previous weeks. If anyone has, then please feel free to write a comment and send me a link. I would be interested in exploring that angle.

While talking about the depreciating dollar and the appreciating rupee, we are making a big mistake when we focus only on the IT industry because “the tech companies spawned in Bangalore employ only 2 million. The textile and apparel industry employs 88 million, and its strength is key to India’s economy”. And these textile industries are not faring very good. If you are in the US, then I’m sure you’ve noticed how most of our clothes are produced in cheaper nations like India, Sri Lanka, Bangladesh, Haiti, and China. The appreciating rupee is not helping their business because the margins are getting cut, their goods are becoming more expensive. They are facing the hard choice of laying off workers. Most of them are courting private equity firms for infusion of capital.

So, whenever I read blog posts that say “India will not suffer” in various permutations and combinations, I can’t help but roll my eyes because most of us love analyzing situations in an uninformed manner, including me. I say that because I can’t rely on these media reports and neither can I rely on the inflated GDP figures of India. Who knows that the real GDP growth rate is. But you’re welcome to contest my views, perceptions and reflections in a civilized manner.

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4 thoughts on “Another Post on the Dollar-Rupee Race

  1. Ruhi: Your $2.89 a gallon made me laugh out loud. In the UK, we pay close to £5 a gallon (or $10 at current exchange rate). May be this difference alone should make some food for thought.

    The reliance on oil is probably the single largest factor driving inflation in the US. The price of oil affects cost of producing and transporting goods, hence their prices. So if oil price rises further, it will make goods costlier, so much less would be bought, leaving producers with surpluses. Less cash in hand will affect their ability to service their debt – and their balance sheets will make it more expensive to raise funds they may need to tide over – which could have a catastrophic effect on their survival. No? It is not improbable, is it?

    Some on the brink of survival may outsource to save costs thus in a manner of speaking, America’s woes may benefit India and offshore locations.

    The whole argument of course has to be seen in the context of the share of India in the global ITES market, which is not very large (not even in double digits). It is not the ocean; more like a trickle, if one can set aside the hype of a minority and the myopia of the ITES folk, a point I often raise.

  2. @Shefaly:

    The gas prices in the US are probably one of the cheapest in the world, I know 🙂 Most of the cars here are gas guzzling and extremely energy inefficient and wouldn’t be running on roads if gas were to get costlier. Not to mention the huge pile of debt that US is under, because of its mission to keep gas as cheap as possible.

    No? It is not improbable, is it?

    Yes, energy costs are of prime importance in any economy, I agree. If we consider it as a fundamental variable, then I will really have to conduct an in-depth analysis on its far reaching effects. I think that it’s not improbable. A weaker dollar is bad bad news- inflation and energy-cost wise.

    Lowering the interest rates, which Fed is doing, will again increase the inflation rate in the short term. What they are looking for is an increase in borrowing and hence investment. But we can’t really rule out the philosophical impact of a weaker currency in the minds of people. So a lower fed rate might not help curb the slow down in the long run.

    America’s woes may benefit India and offshore locations.

    I know where that statement came from, but I feel unconvinced here. Outsourcing to save costs during a slow down would mean ‘expanding’ off shores, no? 🙂 Plus, considering the appreciation of a weak currency like India’s isn’t good news for companies in the US. Already, they’re seeing smaller profit margins. Outsourcing more would only alleviate their concerns.

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