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The Week That Was:

From: Vartaa Editorial Team on Mar 6, 2016

The Union Budget

Finance Minister Arun Jaitley presented the Union Budget this past week with a heavy focus on boosting the rural economy as the government looks ahead to key political battles in the coming months. The markets reacted positively to the budget with both the Sensex and Nifty making gains. There were a slew of new tax measures as well with the most contentious one being the proposal to tax Employee Provident Fund (EPF) withdrawals. The EPF (a long treasured saving instrument of the salaried class) tax proposal led to immediate political pressure and calls for rollback. PM Modi was one of those who asked the Finance Minister to reconsider this decision. As of now while the Finance Ministry may be taking the objections against this move into account, it has not announced a formal rollback of the measure.

JNU Student Protests, Nationalism, and the Freedom of Speech- Part 4

JNU Student Union President Kanhaiya Kumar who was in the middle of the political storm that had engulfed the University over the last few weeks was released on bail this past week. Kanhaiya returned to a rousing reception at JNU and gave a fiery speech in which he targeted the central government and the PM. Police authorities meanwhile seem to be in no mood to let go of their watch over Kanhaiya. The politics continued as well with the BJP expelling one of its Yuva Morcha leaders for offering money to anyone who would 'cut off' Kanhaiya's tongue

India Takes US to Court on Work Visa Fees

There is a visa battle brewing between India and the United States. This past week India invoked a trade dispute against the US for raising fees for H1B and L1 worker visa programs calling these measures as 'trade restrictive practices'. This action came right after the WTO had ruled against Indian government's requirements for local content for solar cell production in India. In another development, India denied visas to the US Commission on International Religious Freedom, a US government organization that monitors religious freedom across the world. The Commission had also been denied visas for visiting India under the previous UPA regime in 2009.

Opinions you must read:

  • The Mint explores whether a slowdown in the Indian VC market is a reality
  • Ex Foreign Secretary Nirupama Rao presents a cogent analysis of PM Modi's foreign policy outreach so far
  • The Indian Express suggests that the politicians lend an ear to what Kanhaiya Kumar said on the JNU campus while also closely examining the Delhi High Court order that released him on bail

Chart of the Week

The Rupee has recently been trading close to its historical low of 68.8 against the US Dollar and many in the financial press have expressed concerns. Non-Resident Indians (NRIs) have been debating whether they should send money to India or buy assets in the country right now or wait longer so they could get more Rupees for their Dollars. Importers are hurting since they have to shell out more Rupees to buy Dollars. Although the Reserve Bank of India Governor Raghuram Rajan has expressed willingness to use Forex reserves to manage 'volatility' in the currency markets, where is the Rupee headed? Why is it falling? And do other emerging market currencies have it as bad too?

We decided to compare the Rupee's valuation to other major emerging market currencies and it appears that the Rupee's fall is not an isolated case and neither is it the worst performer. Almost all major emerging market currencies have fallen against the USD, and rather precipitously in the last year. The exception is the Chinese Yuan but China gets a bad rap for being a currency manipulator and Beijing has repeatedly warned investors around the world about not shorting the Renminbi. Below are some reasons why the Rupee and other emerging market currencies have been falling against the dollar.

1. The Chinese Yuan: Although not as drastically as other currencies, it too has certainly declined. This makes exports of other emerging markets less competitive and demand for their currencies falls thereby causing their devaluation.

2. Inflation: India has consistently had significantly higher inflation than the US. Although a simplistic explanation, this means that the Rupee loses its buying power at a faster rate than the dollar. Argentina has had very high inflation (an average of 21% for the last 4 years) and sure enough the Argentinian Peso has fallen the farthest compared to other currencies.

3. Holding pattern in the face of volatility: Exporters keep their earned dollars abroad, NRIs hold off on making money transfers, buying assets, and investors take a wait and see approach. All this increases the demand for the dollar and Rupee falls even further.

4. Strengthening of the Dollar: Relatively good growth in the US and weak growth in major currency countries (Europe, Japan, and to some extent UK), has strengthened the dollar.

5. Slowing Global/Indian growth: The slow global growth reduces capital inflows and the influx of foreign currency into India. The slow rate of policy and regulatory changes further discourages foreign direct investment. The Make in India campaign, paired with tangible policy changes should hopefully change that.

And there you have it! Hopefully this explanation somewhat demystifies the Rupee's fall and you can make an informed decision about your Dollar-Rupee transactions.

*Chart renders best on Desktop. We publish a modified version for phone.