Jan 30, 2012 12:23 PM
We all know that the rupee has lost about 20% of its value in the past six months and is at an all-time low against the U.S. dollar. What many people don’t know is “why” – or who benefits, who gets hurt, and above all, what does it mean for you.
Currency actually got its start back in the 6th century BC when the people of ancient India became among the first in the world to use coins. In fact, the word “rupee” comes from Sanskrit meaning “shaped coin.”
Certainly the world has come a long way since then. Today, there are about 180 different currencies around the world and their value is determined by a variety of complicated and interdependent banking, economic, and political factors.
However, two currencies – the American dollar and the European euro – have an important impact on all other currencies because these two currencies together account for almost 50% of all currency transactions around the world as well as for almost 90% of all currency reserves that are kept by countries to fund their debts and liabilities.
So when the euro declined severely in value during recent months due to the serious economic problems of European countries like Portugal, Italy, Ireland, Greece and Spain, the effects were felt around the world. There were widespread concerns that if countries using the euro go into default or bankruptcy, the euro might not survive as a currency.
European economic conditions deteriorated further with the recent downgrade of debt for nine countries, so certainly no one believes the problems of the euro have been solved long-term. The result is that the dollar, despite America’s own economic problems, is now seen as a stable, safe currency.
People have confidence that the United States will not only survive, but will eventually thrive. This means people around the world are moving money from the euro and from other currencies into the dollar, which is driving up the value of the dollar and driving down the value of other currencies.
In other words, as the dollar becomes more stable, other currencies – including the rupee – become more volatile. So as the rupee declines in value, who are the winners and who are the losers … and what can you do, both to capitalize on the trends and to preserve, or perhaps even build, your equity?
A declining rupee is good for:
• Exporters – because they get more rupees for every sale in a foreign currency. For example, already benefitting are Indian farm products as well as the seafood industry, which is dominated by shrimp.
• Information technology, or IT, market – India’s IT companies and consultants earn about $70 billion a year, which 80 to 90% of that coming from overseas
• Expatriates or non-resident Indians (NRI’s) – in 2010, NRI’s sent about $55 billion to their families and friends in India, so when they send money now, recipients will get more rupees for that money
• Tourism industry – the money of foreign visitors is now worth more in India, so the country becomes a more attractive travel destination
Who loses from a declining rupee?
• Travelers – because rupees will not buy as much in foreign countries, so traveling abroad will be expensive for residents of India
• Students studying abroad – because their travel, tuition, books, and living expenses will all cost more rupees
• Importers – because whether they are bringing raw materials or finished goods into India, they will cost more
• Investors, especially foreign institutional investors (FII’s) – the Indian stock market was down 25% in 2011 but for foreign institutional investors that was 36% when adjusted for depreciation and it is why right now, investors are fleeing India’s equity markets
• The Economy – India imports about 70% of its crude oil, so the country will pay dramatically more to purchase this oil and the impact on the economy will be dramatic on two fronts
makers of petroleum-based products will pass on their increased costs to consumers, which means prices will go up for items from soap and deodorant to tires and fertilizer and much more – in short, the common man will be hit with inflation
oil prices are controlled so the government won’t easily be able to pass on its increased prices and that will add to a deficit which is already dangerously high
In 2010, India’s economy grew 8.3% which was second only in the world to China. It’s certain that this growth will now slow down to the 6.5 – 7% annual range – and it’s ironic that oil, which has been fueling India’s spectacular growth, will now be responsible for slowing India’s growth by fueling an increase in the country’s inflation and deficit.
The government and the Reserve Bank of India (RBI) have been slow in responding to the decline of the rupee. The RBI should take steps promptly to stabilize the rupee so India remains a competitive exporter, especially given how China is manipulating its currency value.
However, you – and your loved ones living in India – can’t simply wait for the government to preserve the equity you have worked hard to build. You have to look out for yourself and your family.
One way for residents of India to do that: invest some money in the United States for safety, specifically in American real estate through a unique program that combines investment with immigration.
It’s called EB-5 and it leads to a Green Card plus the opportunity to file for U.S. citizenship – and it will be the topic of my column in next month’s issue of Jan Darpan.
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This article is based on a speech made by Nitin Shah on January 14 at the Kutch Forum in Mumbai, a prominent business association in the Kutch region of Gujarat. Mr. Shah is Chairman & CEO of Embassy National Bank, a community bank located in the Atlanta suburb of Lawrenceville which is one of the leading SBA lenders in the southeast. He is also President of Imperial Investments Group, which develops and manages hotels as well as commercial real estate projects. A former Chairman of the Asian American Hotel Owners Association (AAHOA), Shah’s e-mail address is nitinshah@embassynationalbank.com for questions.
