Saturday, June 23, 2012

Rupee---The Youngest Senior Citizen

Senior citizen is a polite designation for an elderly person.  The age which qualifies for senior citizen status varies widely.  In governmental parlance, it is usually associated with an age at which people retire from jobs and pensions starts to become available and concessions starts regarding payment of income tax and also railway and air tickets.

In commercial contexts, where it may serve as a marketing device to attract customers, the age is often significantly lower (remember the 40 plus ads).

In India senior citizen generally means people who have attained the age of 60, although for politics 60 in India is still considered to be very young.

The NRI (non resident Indians) population though is waiting for the Indian Rupee to attain the senior citizen tag, as they are savoring the 25% increase in their income just by virtue of fall in the Indian Rupee.

Age of the county though has no bearing on the exchange rate (just in case you are wondering why 1 USD is not Rs 65 as my 4 year-old niece is).  The next logical question though would be why the fall and the sheer velocity.

The reasons may be manifold but the important ones are:

Balance of payments, which comprises trade balance (net inflow/outflow of money) and flow of capital, also affects the value of a country's currency.  The rupee depreciation might also be driven by the trade and fiscal deficit on one hand and weak capital flows on the other.  The populist measures by the central and state government will only make the deficit larger.  The high risk of stress on the balance of payment (BoP) front that India faces is because of the higher crude prices, and the only way to stave off the crisis is to cut subsidies by reducing the subsidy in fuel (diesel, kerosene and LPG) prices.  A slowdown in capital inflows will increase the pressure on the exchange rate further whereas any hasty exit by FIIs from the Indian markets will help in INRs ageing.

Another reason might be because a great amount of external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs) are maturing and hence the higher demand for INR.

Finally, exports are slowing due to European crisis.

If the European crisis deepens, Greece exits Euro, Spain falters or Italy sneezes and the FII starts pulling out of Indian markets the INR might attain the senior citizen tag pretty soon.

On the other hand if the government changes some policies and brings in the insurance and pension sector bills, FDI in retail and aviation, and other initiatives for FDI in India, INR might then well get back to the late 40s pretty soon.