Lok Sabha 2014

With General Elections scheduled in April/May coming year, every political party is busy finishing their job; no matter whichever approach they follow. Well for your general knowledge, there are more than 20 national political parties registered with Election Commission of India (as on 30^th Sep 2013) all across the nation. And every party is  putting its finest effort in strategizing and designing the blue print of approach it will going to follow to knock down the opponent in battle field. But the centre stage has been held by Congress and Bharatiya Janata Party (BJP). Everyone including industrialist, investors, and many more keep a continuous watch on the practices followed by both the parties to knocking opponent out.

Post independence, Indian government- CONGRESS was facing complications in delivering the elementary facilities (Roti, Kapda, Makan) to common man and today, following 68 years of independence, same issues still troubles the same Indian government – CONGRESS. In 60 years of its regime nothing has improve; Poverty still prevailing at around 35% of population; Manufacturing sector is still lagging behind as in 60s-80s; sky touching Inflation (mahgaai) and many more things which remain unchanged during all these year but the things changed were the leaders, increase in number of scams from Boforce to Common wealth to Coalgate scam. Beside all these negatives, Congress has taken few bold decision in past as well with opening of Indian economy in 1991 (Liberalisation, Privatisation, Globalisation) and Nuclear deal with US in 2007 but these positives probably would not come to rescue Congress this time. And if people of India would look for achievements of ruling government before casting their votes, will find a lot many numbers of scams, increase in poverty, increasing unemployment, and double digit inflation with continuously decreasing GDP which could change their thought in mind. On the other hand, main opposition Bhartiya Janata Party (BJP) has always followed the ideology of RSS; i.e. Hindutava, which part the society on religious ground. 

Both parties have nominated their Prime Ministorial candidates, and preparing their military for the faceoff coming next year. Narendra Modi ‘senapati’ of BJP, is leading from the front while the ‘yuvraj’ Rahul Gandhi is in command from Congress. Namo holding development as his key armour to convincingly defeat his opponent. In his extremely enthusiastic, motivated, passionate and energetic speeches, he solely talks of development of nation as whole without any discrimination (based on caste, creed, and religion or on anything). In his campaigns, throughout the nation he tried to spoke of the initiatives taken by his party toward the path of prosperity in Gujarat during the last decade of his regime. On the other side, Rahul pushes one issue persistently and that is industrialisation. This linked to his favourite “industrial corridor”. But outside these corridors there is nothing. 

It might be wrong to say but I think, there is need neither of Gujarat Model nor of Industrial corridor, but improving the productivity of our people. And once achieve, everything else will follow. As productivity is the fundamental lever that drives the improvement in the living standards of the society and to achieve this parties needs to create more and better jobs.

Today, everyone is clueless about results of the Lok sabha election. But if BJP touches the magical number, would current chief minister of Gujarat Narendra Modi be able to implement its ‘Gujarat Model’ in much broader aspect or if Congress defends its chair in centre, would Rahul Gandhi be able to accomplish his dream project.  And people of India would definitely willing to see the fate of the country. But I would appeal, every Indian should think twice before casting their vote. Don’t let your vote go waste. Use your vote for greater purpose despite using it for caste, colour.

Currency Swapping

I believe, those who are reading this must have come across “Currency Swapping” very frequently in recent past. This phrase is all over in news at least when it comes to Indian economy as a short term measure taken by Reserve Bank of India (RBI) to set a check on its increasing Current Account Deficit (CAD) and cater the rising demand of US dollar, which has already shown its positive impact on Indian economy and give a sign of relief to its policymakers, of course in short run. But, have you ever think, what this economic phrase means. By taking a glimpse someone align his/her thoughts and can easily say “exchange of currencies between concern parties (not necessarily countries)” and to some extent s/he is correct as well. But still there are few doubts or some questions which put our mind in strain.

What is Currency Swapping? And what are its impacts on our economy?

Let me take an example to make you understand in effective way. You must have heard of “India inked agreement of worth $50 billion Currency Swapping with Japan and in talk with more than half a dozen of emerging market”. So what is this all about? This facility between Reserve Banks of India and Bank of Japan enable both the parties to swap the Indian rupee or Japanese Yen for US dollars in an unforeseen situation at certain fixed/floating rate (depends on negotiation between parties) up to the maximum limit of $50 billion. The interest payable by both the parties would be in dollars and at maturity principle amount would be exchanged back. This shoot up the Forex Reserve of dollar with RBI, bridges the Current Account Deficit and ease the demand of USD in domestic market.  And helps Indian Rupee to strengthen against USD.

RBI also opened up swap window with Indian Oil Companies to meet their demand for dollars which will be ending sometime in next year. Being an importer of Crude oil, Indian Oil Companies needs dollars to clear their dues. But increased demand for dollar and continually weaken of rupee made the scenarios even more worsen for Oil sector to meet their targets.  In order to tackle Oil sector’s dollar demand, Governor Raghuram Rajan came up with scheme of currency swapping with Oil Companies in which RBI cater increasing demand by providing adequate resources (dollars) to finance Oil Companies and as per the latest progress will accept the dollar repayments by oil marketing companies in rupees if time calls for it.

In an another move, RBI urged banks to raise fund by borrowing through two special windows for swapping which will be ending on 30^th November, Foreign Currency Non Resident (FCNR)  deposits and Overseas foreign currency. The special window allow banks to swap FCNR dollar funds for a minimum period of three years or more, at a fixed rate of 3.5 percent for the tenure of deposit.  The RBI also allowed banks to borrow up to 100 percent of tier I capital from overseas, which later on can be swapped with RBI at a concessional rate of 1 percent below the swap rate prevailing in market. And this move RBI has fetched 17.4 billion dollars in its basket.

RBI has taken various measures, one of them were  is “Currency swapping” to set a check on free falling India Rupee and to bridge Current Account Deficit. And this measure has aided RBI at least in short run. Green shots have been seen with easing demand for dollars and with appreciation in Rupee against dollar.

Dancing Rupee

Their exist a strong correlation in Interest rate, Inflation and Exchange rate. Central bank of any state (RBI in India) make adjustment in Interest rates to keep a check on Inflation and Exchange Rate which have impact on their respective currencies (depreciation or appreciation). The valuation of any currency is relative i.e. it is evaluated with respect to some other currency. This can be understood by the basic "Demand and Supply" principle of micro economics which says "increase or decrease in demand, will back the price in same direction"  and "increase or decrease in supply will have a inverse effect on price". A currency will tend to become more valuable when its demand is higher than supply and vice versa. Or let me put it in more effective manner with an example of dollar vs Indian rupee to understand this in better fashion. Suppose there is increase in demand of dollar i.e. less supply of dollar in market, you would have to pay more Indian rupee to buy one dollar. And here paying more rupee signifies the depreciation of rupee. Similarly when supply is more than demand, rupee appreciate.

Indian economy is drifting through the challenging phase post 2011 with the very existence of recession and inflation together in economy. Measures to control one would worsen the effect of another.With already existing two evils, in recent past, we had seen the third one with the radical and extreme fluctuation in Indian rupee. From 54.76/dollar in month of June to 68.85/dollar on 28th of August, steep downside movement in rupee made the challenges even more challenging. Within a span of just three months rupee plunged down by nearly 21 percent in its valuation against US Dollar. There are many reasons like inflation, interest rate, political uncertainty and many more. Lets see what were the major reasons backing the weakening of rupee to weaken it in more acute way.

The first and the foremost ground, supported the rupee depreciation was Current Account Deficit(CAD). The current account deficit is equal to the trade balance (whether it's a surplus or deficit) + factor income (interest and dividends from international loans and investments) + cash transfers (like remittances from workers in the country to their families abroad).  In simple terms CAD means incoming money is less than the outgoing money, caused a net outflow of foreign exchange means dollar's outgo, results increasing demand for dollar in Indian market, aided rupee to depreciate. Prime reason for widened current account deficit were enormous oil import and import of yellow metal (Gold) on large scale.

Another important aspect for rupee depreciation was the buzz of beginning tapering of the $85-billion per month quantitative easing (QE) that has been on since September 2012. Quantitative easing is the monetary policy used by central bank of the economy by buying financial assets from the commercial banks and private institutes to revive the falling money supply i.e. liquidating the market. The immediate impact would be on rate sensitive bond market where foreign institutional investors (FIIs) had about 30 billion dollars of investments. With the announcement of tapering by Ben Bernanke in June, there had been a massive outflow of some 10 billion dollars of FIIs from their Indian bond market between June and August which had its vast impact on Indian currency market with moving of rupee deep into the ocean.

Few measures taken by RBI and government of India to support rupee are:
1. Government has raised the import duty on Yellow and White metal to check the CAD.
2. RBI will sell Rs22,000 crore of bonds every month to regulate the volatility of forex reserve.
3. Government inked 50 billion dollar of currency swap with Japan and considering another half a dozen                  emerging market with which India can trade in rupee. This lessen the dollar's volatility and give boost to rupee.
4. The RBI has tightened liquidity to reduce money from the system. This increase the short term interest rates, which attract the investor to invest in India.

There were other measures as well taken by RBI to regulate dollar outflow and to boost rupee. All the steps taken by RBI or by government of India are well in place, addition to this I think government should strategies some master plan or should come up with certain proposal to improvise its manufacturing sector which is lagging behind post 70s to reduce the burden of import and flourish export.