It is not all bad news when domestic currency falls and these are the reasons why
It is not all bad news when domestic currency falls and these are the reasons why 
National symbols have emotional overtones, even everyday ones like the national currency. It is no wonder then that the national pride seems to take a hit each time the value of the rupee tanks against the US dollar. Any upsurge in the currency seems to be a matter of relief, almost of validation. The rise of the rupee vis- -vis the dollar seems to represent faith in the new economic story we have wrought, which has brought us into the conversation in the new world economic order. If the rupee falls, it dents the faith. And yet, it is not all bad news when domestic currency falls.
Volumes
It is true that when the rupee falls, then our imports become more expensive. At the same time, while in rupee terms, our exporters earn the same; Indian goods are cheaper in dollar terms. This is like the currency depreciation giving a national discount on our goods -- which normally boosts sales. So, for example, our BPO industry, which was on its way to becoming uncompetitive, due to rising prices now comes back into play --at least in the short term. It is even easier for goods manufacturers to declare reduced dollar prices on their products and improve their volumes. The people who suffer in these times are those who are dependent on imported goods and components -- their costs go up. 
The same of course works for investments; it is cheaper to buy assets in India now than it was six months ago. This has to be good news at a time when we are opening up our economy at a cautious but steady pace. Of course, conversely, it hits those of us who were planning to buy businesses in other countries -- unless our target market has a currency that lost value too.
Stringent
The depreciation of the rupee was a regular part of policy in the days of, 'Be Indian, buy Indian'. We were a poor country and needed export revenues and other dollar receivables to pay for essential imports such as oil and basic machinery. Investing in business abroad was unthinkable. Things improved after the 1991 reforms, the boom years were good to us. The rupee strengthened as we earned dollars. Reserves rose and we were able to import goods and invest in assets in other markets. But now, in times of economic crisis with tightening demand, the boost that we receive from this rupee depreciation is a blessing in disguise. It may even be a boon in the long term for outbound investors, who are forced to look more keenly for value in their acquisitions -- investments that looked good with a strong rupee now need to pass more stringent tests to justify the outlay.
Plenty
The decade of plenty has also been one of inflationary pressures being built in the domestic economy. That means our goods became more expensive, but the rupee depreciation cancelled that out in some measure -- so the dollar prices do not look that inflated. We do not have to pay the full penalty for our internal price pressures and inefficiencies when we step out of the country to sell our wares. We pay in other ways, of course. The currency exchange rate is like a dance in tandem with interest rates, domestic prices and a few other partners. When currencies fall, there will be linked changes in our dollar debt, our domestic inflation, and our interest rates. The combination is often unpredictable. This uncertainty is what traders and investors hate. Uncertain markets become volatile, which is fun only for currency traders, as they can make money in the rapid ups and downs. Long term investors who create value like to understand what they are getting into before they invest. For them, the currency rate dance needs to be predictable. China is a case in point -- for years their currency was pegged to the dollar to give an illusion of stability, which boosted investments and trade, even though the currency was artificially undervalued.
Conditions
For a currency to do its job well, it needs to respond to market conditions. For currency policies to be effective, future problems need to be anticipated and pre-empted. Given current realities, where it makes sense to bring in and hold hard cash -- a weaker rupee for a while makes us a more attractive market. But more than just the level, what traders, investors need is predictable patterns that will help them decide.
Meeta Sengupta is a writer and researcher in education policy and international business
Currency Scene
Burgernomics
New Delhi: If a Big Mac burger from local McDonald's outlet is taken as a benchmark, India is the place to get it cheapest in US dollar terms, but this analogy also makes the rupee the world's most undervalued currency. As per the latest Big Mac index, compiled by the Economist magazine to analyse purchasing-power parity of various global currencies, the Swiss franc is the most overvalued in the world, while the rupee is most undervalued. India was included in the index in July last year and has continued to rank the lowest on the list, which is compiled on the basis of the US dollar equivalent of the price of one Big Mac burger, priced USD 4.20 apiece in the US. As per the latest index, prepared on basis of market exchange rate as on January 11, its price is the highest at USD 6.81 in Switzerland, while the same is sold in India for just USD 1.62 --the lowest in the world. Rupee had depreciated sharply by about 19 per cent last year and even fell to a record low of 54.30 against the US dollar on December 15, 2011. The current exchange rates peg the Indian currency at about Rs 51 against the US dollar. The price of Big Mac burgers of McDonald's is considered for the index for the reason of the presence of fast-food chain across most of the countries and the magazine calls this theory 'burgernomics'. "Though because Big Macs are not sold in India, we take the price of a Maharaja Mac, which is made with chicken instead of beef," it added. "Nonetheless, our index suggests the rupee is 60 per cent undercooked. The euro, which recently fell to a 16-month low against the dollar, is now trading at less than euro 1.30 to the greenback," the Economist noted.
Reference
Mumbai: The Reserve Bank of India (RBI) fixed the reference rate for the US dollar at 51.0650 and the euro at 64.9998, as against 51.6545 per dollar and 65.3173 per euro on Monday. In a press release issued by the RBI, the exchange rates for the pound and yen against the rupee were quoted at 78.4818 per pound and 66.59 per 100 yen, based on reference rates for the US dollar and cross-currency quotes at noon. The reference rate is based on the noon rates of select banks here and the SDR-Rupee rate would be based on his rate, the release added.
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Strengthens
Mumbai: The rupee strengthened by 32 paise to 51.05 per dollar on the Interbank Foreign Exchange market in early trade yesterday, supported by continued foreign fund inflows. Dealers said consistent dollar inflows and euro's gains against the US currency overseas, mainly supported the rupee. The rupee had gained 15 paise to close at nearly one-and-a-half month high of 51.37/38 against the dollar on Monday, on the back of late recovery in equities and mild dollar selling.
Meeta Sengupta is a writer and researcher in education policy and international business
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