Re now 39.90 to a $

LIFE BELOW 40: WHAT IT MEANS FOR YOU
Re now 39.90 to a $
Best In A Decade, Good News For Overseas Tourists, Students
Ten years ago, every time Indians travelled abroad it was common practice to stash away some dollars for the next trip or for the children’s overseas education. As the rupee touched an alltime low of 49.06 against the dollar in May 2002, this strategy seemed to make sense. The rupee was surely going to fall all the way to 60 against the dollar, and then all those dollars that had been hoarded would prove to be a fabulous investment. Today, that doesn’t seem like such a smart idea. The rupee on Thursday appreciated to its highest level in almost a decade. A dollar can now be bought for less than Rs 40, the first time that’s happened since May 13, 1998 when the fallout from the Pokhran II nuclear tests drove the exchange rate below that mark. When the forex markets closed for the day, the dollar was at Rs 39.89, leaving importers celebrating and exporters worried about shrinking margins. Other people too will cheer or jeer depending on their situation. If you are planning to travel abroad, you are probably grinning at this news as you will have to pay less to buy the same number of dollars. It’ll allow you to do some extra shopping. It’s good news too for consumers of imported goods—but only if the savings are passed on. Students too will have to shell out less for studying abroad. But it’s not such good news for NRIs like Sunita Williams who are touchingbase with their home country—they’ll pay more every time they swipe an international credit card. It also hits families who are sent money by kin from abroad—the same number of dollars will now fetch them fewer rupees.Conversely, if the rupee continues to gain against the dollar, foreign institutional investors (FIIs) will find investing in India even more attractive as their dollar returns will keep rising even with steady rupee returns. The strengthening rupee is especially good news for oil companies, which had been facing escalating international crude prices—now above $80 per barrel—and a government that was unlikely to let them hike prices domestically with elections anticipated in a few months. Like the oil companies, importers of gold too will be pleased that domestic prices are holding relatively stable at a time when the global price of the yellow metal is hitting all-time highs. On the flip side, software export firms face an erosion in already thinning margins as the number of rupees they earn for every dollar worth of software exported keeps dropping. Textiles, garments and leather exporters are other major losers from the strengthening rupee as global competition prevents them hiking their dollar prices too much, which means lower and lower rupee earnings as the rupee gains against the American currency. Why rupee is appreciating? Dollar inflows have been rising in recent years. Earlier, RBI made sure this did not lead to rapid appreciation of the rupee, since that could hurt exporters. With inflation now a serious worry, RBI has gone easy on buying up these dollars since that would pump more rupees into the system and fuel prices What will be cheaper? Anything imported. But that’s only if those importing decide to pass on the lower rupee prices to their consumers. Things like cellphones and PCs should see a cut in prices if the trend continues FIIs, FDI flows propelled Re surge The strengthening rupee may have cheered up Indians planning foreign tours and oil companies, but it’s not great news for exporters. What explains this surge in the rupee’s value against the greenback? Actually, it’s not been sudden at all. The rupee had been straining at the leash for some years now as dollar inflows kept moving up. The increase was driven partly by growing software exports, but more importantly by FIIs flocking to cash in on the ‘India growth story’, NRI deposits lured by interest rates better than they could get in their country of residence and also higher FDI flows. Normally, simple demand and supply forces would have ensured that the rupee strengthened against the dollar. The RBI, however, ensured that this did not happen by buying up dollars as fast as they came in and building up reserves, which are now at more than $200 billion. That’s changed in recent months, with the central bank forced to view inflation as a more serious threat to the economy than a rising rupee. The problem was that the strategy of mopping up dollars meant pumping equivalent sums of Indian rupees into the market, thereby increasing money supply. Higher money supply means more rupees chasing the same amount of physical goods, and the same forces of demand and supply then ensure that the price of goods goes up. Thus, the RBI has had to go slow on mopping up dollars. As a result, the rupee has been threatening to breach the Rs 40 mark for several months, having moved rapidly from Rs 44 to the dollar in March to below Rs 41 by June. Thursday’s milestone was really a matter of when rather than if. The interest rate cut by the US Federal Reserve ended up accelerating the trend, as India’s interest rate became even more attractive in relative terms. In the last two days, the dollar dropped from Rs 40.43 to Rs 39.89, a 54 paise fall. Where do things go from here? Classical theory would suggest that as export earnings drop and imports surge, the demand for dollars will start outstripping supply and hence act as a check against runaway appreciation of the rupee. That, however, is the economists’ idealised world of perfect markets responding only to demand and supply. In the real world, markets are neither perfect nor fully informed. The reality may, therefore, turn out quite different. Also, if foreign investors—FIIs and FDI—continue to see India as the place to be, widening trade deficits may do little to dampen the inflow of dollars.