Rupee appreciation: whats the alternative?

There's been a lot of noise in the Indian economy recently about the seemingly unstoppable appreciation of the rupee (INR). The IT Services sector has been particularly hard-hit, with every USD of revenue earned realising ever-smaller amounts of INR earnings. The fledgling manufacturing sector is hard-hit as well...as is the textile industry.

India is not as export-earnings dependent for the health of its economy as say, China...yet, exports do contribute significantly to our GDP. As a result, there have been vociferous calls by the industry as a whole, for the country's central bank (RBI) to intervene in the currency markets to stem this rise of the Rupee. To do this, the RBI has been buying $$$ by the drumfuls to offset the increased demand for its own currency.

The trade-off is that the Central Bank has been printing extra currency to buy the foreign currency. This has introduced extra Money supply into the economy, fueling inflation. Inflation is then typically controlled by selling “sterilization bonds” to the government, thereby draining the economy of excess liquidity.

Now, this all works seemingly well theoretically but there are significant disadvantages to taking such intervention too far. For one, by buying these bonds, the government ends up investing its capital sub-optimally since it earns very poor returns. This capital could be more efficiently utilized by investing in the private sector, which has consistently shown higher returns than govt. bonds. Alternatively, the money could be invested in infrastructure, alleviating the ever-growing supply constraints of our economy.

Second, these $$$ purchased now need to be invested somewhere and this is typically done in US Treasury bills. Interest rates in the US have been lower than that in India for a long time now, resulting in lower returns on these investments.

Finally, higher interest rates in India and higher returns from Indian equity markets will continue to attract foreign capital inflow. This will continually push the rupee higher, leaving us in an infinite intervention loop! Where is the end?

Rather than fighting this appreciation full-on, we need to utilise these incoming funds to improve the supply-side of our economy. This means infrastructure, education, health services. In addition, access to extra capital must be provided to the private sector to leverage its ability to operate efficiently and squeeze out maximum returns.

An appreciating currency is simply a macroeconomic reality of a growing, open economy such as India's. Eventually, this cannot be fought away. Its upto us whether to pander to domestic fears and continually intervene OR to follow a more balanced approach by investing in the future.

No monkeys...only mothers

So, it wasn't "monkey". Rather "maa ki".

This is easily the most hilarious article I have read in what has now been a week-long fracas of the whole Harbhajan-Symonds so-called racism row.

A must read...

The Intelligence Bell-Curve...

This is not a new story. In fact when it broke a few years ago, there was little to indicate the consternation it would eventually cause. In 2005, the (then) President of Harvard , Lawrence Summers, gave a talk on campus in which he allegedly stated that effectively, men are better at math & high-end sciences than women are. At least this was how the story leaked out...which predictably raised eyebrows for some and infuriated others.

As Summers clarified later, he believed that the average woman was just as capable in these academic fields as the avarage man is. The difference was that men have a higher variance. I.e., the deviation from the mean is larger for men. Hence, the smartest scientists in the world are men since this represents the highest positive deviation from the average. This is illustrated somewhat in the figure shown.



Of course, Summers failed to mention that by this logic, the dumbest people on earth are also men since a Bell-shaped curve is symmetric in nature. Deviations are equal in both directions. It was perhaps this acknowledgment (or lack thereof) that really incensed everyone. Why focus on only the smartest of the lot? Shouldn't any such proclamation be balanced with all relevant facts?

Perhaps, Mr. Summers just didn't care. Or perhaps the place he was in was a factor. Harvard typically has within its boundaries the smartest of the lot anyway and Mr. Summers would only have seen these samples. He was eventually forced to leave his position, largely as a result of the controversy this created.

The reason I talk about this now is that apart from the objective analysis, the issue also rakes up layers of emotional fervour and pyschological complexities, particularly amongst the females of our lot. Fervour that for most, transcends the logical explanation. One mention of this to my sister for example, resulted in the proverbial "if looks could kill, you'd be burning in hell" stare. I fear I'll fare no better with my girlfriend either.

And this, perhaps more than anything else was Mr. Summers' undoing. If his intention behind saying this was to present a genuine piece of academia, surely he needed to be sensitive to the soft issues surrounding such an asertion. The world isn't black & white....and a person's thought process isn't necassarily governed by raw facts either. Our internal value system and sense of right-and-wrong often obliterates raw logic.

Just as the hardest of negotiators build a bridge for communication first and seek to explore viable options for their counterparts before moving to the subtance of the negotiation, a leader's ability to break down long held beliefs before thrusting his own are crucial to its acceptance. Think Abbie Hoffman (of Chicago 7 fame)!