Saving the Rupee

We need a little faith, and perhaps a Pied Piper

Luis Miranda
Updated: Aug 28, 2013 10:47:11 AM UTC

Luis Miranda connects dots. He started investing in India's infrastructure a long, long time ago. He started IDFC Private Equity and was earlier a part of the start-up team of HDFC Bank. Luis has invested in and has been on the boards of companies like GMR Infrastructure, L&T Infrastructure, Delhi International Airport, Gujarat Pipavav Port, Gujarat State Petronet, and Manipal Global Education. Luis today spends most of his time, together with his wife, on non-profits. He is Chairman of CORO and Centre for Civil Society and Managing Trustee for Collective Good Foundation. Other organisations include Take Charge, 17000 Ft Foundation, SNEHA, Sunbird Trust, Operation ASHA and Educate Girls. Luis graduated with an MBA from Chicago Booth and is a Chartered Accountant.

I want to join the hordes of ‘experts’ who are commenting on the value of the rupee, what the RBI should do, etc. What right do I have to write about this? Many… The main one being that my daughter is off to the US to study next year and her college bill is going up very fast! Maybe because I spent 11 years of my life in the dealing rooms of Citibank, HSBC and HDFC Bank advising clients on how to hedge against a falling rupee. And I was wrong quite often. So I guess I am eminently qualified to also write about the rupee.

First of all, I haven’t met anyone who knew what the correct price of the rupee should be against the US dollar or any other currency. Anyone who can claim to know that is God. And yes, I believe in God. But I haven’t met God in any dealing rooms or economist’s adda or in a press room or TV studio. So if someone says that the rupee should be at 70 to a dollar she or he is talking nonsense. Of course if everyone says that the rupee should be at 70, then the rupee will indeed head towards 70. But that doesn’t mean that the correct exchange rate should be 70… or 50.

The simple fact is that people buy dollars and sell rupees if they either (a) need dollars to make a payment, (b) expect the rupee to fall further and want to lock into a rate for a future payment, (c) want to anyway lock into a rate for a future payment to remove any exchange rate uncertainty or (d) want to punt on the value of the rupee through a trading position.

Speculators punt on the value of the rupee. And everyone loves to trash speculators. They are treated the way people treat rats. I detest rats. I find them creepy, and many years ago I nearly jumped off my terrace when a tiny rat showed up. A few years before that one of my Sunday School students gifted me a white mouse knowing that I dread these creatures. So most people want to get rid of rats. But rats have an important role to play in the food chain. If we got rid of all the rats we will have other problems… other pests will proliferate, garbage will increase, etc. So while we shouldn’t eliminate all rats we should control them. We have seen how difficult it is to control the rat population and the areas in which they scavenge.

The same with speculators--they play a very important role in the FX markets by supplying the ‘noise’ element and lubricating the system. If we remove speculators we will have violent swings in the value of the rupee because some ‘wise’ person would be deciding what the value of the rupee should be in an illiquid market; and as I have said earlier, that person cannot play God.

But I have got lost in my ramblings… how does one save the rupee? As long as people have little confidence in the stability of our economy they will have little faith in the rupee. The RBI can do little to reverse that sentiment and it is foolish to expect the RBI to have a magic potion. So the solutions are simple: Bring back confidence in the economy by reversing the reversals in the reforms process (a great article by Ajay Shah recently), monetise the gold held by the Tirupati Trust (that was Jamal Mecklai’s suggestion), stop the barrage of negative articles and talk shows in the media by ignorant people (a recommendation of my dad), focus on the good stuff happening around us (eg the growth in the rural economy), complete stalled infrastructure projects to show that the government is committed to action (as opposed to announcing new projects which will find poor response), cut down on socialist schemes which increase the fiscal deficit, get a Pied Piper to lead all politicians off a cliff (that was my idea, related to my aversion to rats)… Okay, maybe all of these measures are not possible and I am painting too rosy and simplistic a scenario. But the current government got us into this corner with great ease and they can get us out as easily.

We are a nation of emotional people who swing widely from euphoria to despair very easily. I recently attended a talk on the Indian economy in Singapore where our sentiment towards the Indian economy was compared to our sentiment towards the Indian cricket team. In May 2011 Dhoni’s house was stoned. In May 2013 he was condemned for being too close to Srinivasan. And now he is worshipped as India’s greatest cricket captain. This morning a friend reminded me… oil was at $28 in 2003. If someone told us that it would be around $100 ten years later, we would have fled India and moved to an oil exporting country.

Well, many of us stayed on and India is still going strong. So let the rupee fall to where the market wants it to be. All I know is that this is a great time for foreign capital to be investing in India. It is a lot like 2003… Over the five-year period from 2003, oil prices went up 3 times, the stock market in India went up 6 times and the rupee appreciated against the dollar by 14 percent.

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