Article Ref: 10-006 of 1 st August, 2010

India is a giant country that has seen the “Best to Worst days cycle” in last 2000 years. India
used to be the largest GDP growth grosser in first 12 centuries. Here is what Mr. Maddison
wrote:

According to econom ic historian Angus Maddison in his book The W orld

Econom y: A M illennial Perspective, India had the world's largest econom y
from the first to eleventh century, and in the eighteenth century, with a (32.9% )
share of world GDP in the first century to (28.9% ) in 1000 AD, and in 1700 AD
with (24.4% ).[8]

Most people, including Indian them selves, try to analyze the country under telescope and
m icroscope but fail m iserably. They finally give up in despair with ITDC picking up their breath
with cam paign - Incredible India. Nothing hurts or glees the Indians except some false prides at
tim es, and India walks through the global econom ic forest like an elephant unm indful of
adm irers or foes. The Indians worship “Lord Ganesh” the Elephant God in full sym bolization of
the true nature of the giant country.

Rated as the poorest country only 60 years ago, the India has rediscovered itself in last 7 years.
Contrary to populist belief that foreigners robbed India of its true wealth, it is the Indians who
frittered away its glorious wealth to the foreigners. Indians are known to punish them selves -
they do fasting or eat one tim e for 3 out of 7 days in a week, roll them selves on roads to
worship the deities, lash them selves with cords, in m anifestation of religious belief to purify
their souls.

India’s Central Bank - Reserve Bank of India, Prim e Minister Manm ohan Singh, Finance Ministers
Pranab Mukherji and erstwhile P Chidambaram, have robbed India of its real wealth by
constantly devaluing its currency - Indian Rupee - for over 60 years. Ask yourself and after
getting an answer, ask these glorified leaders, why the hell the Indian Rupee should have been
devalued by 90% over last 63 years when its population rose three fold, industrial production
rose ten fold, agricultural production rose twenty tim es in green revolution, its hum an exports in
the form of educated im m igrants rose thirty tim es to western and gulf countries, its brainy
exports (software) rose almost 100 tim es and its GDP rose to the fastest rate over last few
years?

These leaders, som e renowned econom ists, were “classic book type” bureaucrats who applied
their intelligence when com m on sense was required. As result, Indian goods were sold out
abroad dam n cheap and m ade the im ports of essential com m odities expensive to alm ost entire
Indian society.
Look at the following table:

! The table illustrates the

figures since 1973.
! In 1950, the exchange rate
was Rs. 4.7619 against Rs
47.61 today - 90%
devaluation
! In other words, the Indian
com m odities were sold out
alm ost free of cost.
! Vital com m odities like Oil
and coal were priced alm ost
100% higher raising petrol,
diesel, fertilizer,
transportation, electricity,
cooking gas, kerosene and
ATF for airlines.

How India im ports inflation by devaluing Indian Rupee?

1. Most of the com m odity prices are denom inated in US Dollar. After years of paper trading
through derivatives to lower the com m odity prices, the financial crisis brought them to halt,
and in fact they have started surging. The continued devaluation or proactive suppression of
appreciation of rupee by RBI intervention, what they call “sterilization operation”, the higher
comm odity prices in the international m arket translate into higher prices in Indian rupee.
This forces the local producers of those comm odities to raise the prices, resulting into higher
than expected inflation.
a. EXAMPLE 1: if steel or m etal prices rise in international m arket in USD terms, the effect
is felt m ore in rupee term s due to weaker rupee. As result, the local producers raise the
prices. The real estate prices also rise due to higher input of these com m odities such as
steel, cem ent, copper and alum inum .
b. SEBI’s Role in flaring up inflation: SEBI introduced the futures and options in
comm odities at m ost inopportune tim e. Most of the com m odity contracts are “non
delivery based” and “cash settled” in rupee term s (what they call “badla”). For instance,
a contract of com m odity A (say, steel, sugar, corn or soyabean) is cash settled without
any delivery. A speculator is encouraged to “paper trade’ and bid up the prices on the
MCX with the hope to settling the trade on “difference” basis on settlem ent date. Due to
higher paper prices of such com m odities, the physical m arket too gets fillip to get higher
resulting in higher inflation. These com m odities are of daily necessities and form large
part of inflation index.
c. RBI’s role in propping up inflation: RBI too prom otes inflation by deliberately
devaluing the rupee or restraining its natural rise.
i. W hen the foreign funds bring in the dollars and try to buy in advance Rupee from
the free m arket, the RBI restrains them and give them better “off m arket rates”
to avoid their buying rupee from local m arkets. As result, the Rupee that should
have gone higher due to foreign funds inflow, turns lower or rem ains stable at the
m ost.
ii. RBI’s so called “sterilization m easure” interfering in free m arket m echanism
restrains the Rupee appreciation that causes inflation by letting dollar
denom inated com m odity prices quoted higher in rupee term s. It encourages
speculators to engage into non deliverable comm odity contracts with passive
participation of SEBI, that causes the local m arkets to boost those com m odity
prices, resulting in double digit inflation.
2. Oil Prices - m ajor inflationary factor encouraged by RBI: Large part of the India’s
im port is due to higher oil prices. When the oil prices rose by 100% in $ term s, and Euro
also rose by 90% (from 0.84 to 1.60 sometim e back), the effective rise in oil prices in local
currency (euro) in euro zone was significantly subdued resulting in low inflation and also low
interest rates.
a. However in India, due to RBI’s reckless policy of intervention in the nam e of sterilization,
caused Rupee to fall from Rs 39 (during BJP tim e) to Rs 48 at present (devalued by RBI
under Congress governm ent by 23% ). The rise in oil prices were inflated m ore by 23% in
rupee term s, necessitating in higher Petroleum subsidy running into Rs 200,000 crores in
last 4 years.
 i. The governm ent is then caught in dilem m a. Either it has to cut the subsidy at the
cost of public outrage which m ay cause election loss or raise the taxes to balance
the budget avoiding deficits.
ii. The recent cut in oil subsidy by letting the m arket forces determ ine the petrol and
diesel prices, the m ere rise of just 6% in oil prices caused the inflation to run into
double digits forcing the RBI to raise the interest 3 to 4 times recently by almost
1% point. It raises the cost structure in entire econom y, reduces the housing
dem and due to higher m ortgage financing rates, reduces the Auto dem and due to
higher car financing rates, lowers the disposable income in the hands of
consum ers forcing GDP down and in general lowers the econom ic activity in every
segm ent that would finally lead India towards “forced recession”.
iii. Only RBI’s m isconceived policy of devaluing rupee by pro-active sterlization
actions tem pering the free m arkets encourages inflation. Surprisingly, sam e RBI
and Finance Ministry, including Prim e Minister, go on talking about free m arket
under WTO to reduce the taxes and open up the m arkets when their own deeds
on currency (Rupee) front acts diam etrically opposite.
iv. No one hates Indian Rupee m ore than RBI, M inistry of Finance and
Indians them selves. Rupee is the face of the nation. It is also the m ost visible
child of the nation. We have to love our child and take full care of it. Look at
United States. In spite of its enorm ous economic problems, it always seeks
“Stronger dollar” even when the fundam entals do not warrant. Why do we
Indians, the Micky mouse im itators of Am erican way of life in all aspects, do not
follow this basic rule to support our own currency? Why do we hate our own child?
v. All Indians should Ask them selves; do we want our children “weak or becom e
strong”, self supporting and earning m ore in adult life to help entire fam ily
including parents?
vi. If that was so, why do we Indians go on depreciating our only child - Indian
Rupee - for over 60 years? When our child turns into adult after about 21 years,
we let him roam around free and start earning. If he does not earn and support
the fam ily, he is ignored or abandoned. In that case, why do we have to “support”
the rupee even after 60 years, when leaving it alone could usher in new econom ic
age in India?
vii. The “Reservation policy” aim ed at supporting Scheduled Tribes and Scheduled
Cast is almost sim ilar. Why do not they grow up after 63 years of independence
and support them selves after first 21 years of adulthood?
(1) The “reservation” in every field has become a perm anent license for them
to rem ain weak, backward and inefficient in their entire life.
(2) The m erits therefore take a backseat, undesirable people m an the
government departm ents, and the corruption pervades like a fire in the
dense forest.
b. The refineries lost m oney due to their portion of subsidy, com m on m an lost in higher
kerosene or gas prices, airlines lost because of higher cost of ATF, land transportation
such as Railway and Road Transport cost higher due to inflated energy cost, and cost of
electricity rose due to higher inputs of basic raw m aterial such as Oil, diesel or coal.
i. The energy bill (Electricity + Gas + Petrol/diesel for hom e driven auto) constitute
almost 25% of household budget. The rupee devaluation by 23% since BJP rule,
shrank their disposable incom e by 5.75% (23% of 25).
ii. As result whole cost structure in the country rose to unsustainable level, raising
inflation to alm ost double digits, requiring higher interest rates or tightening of
cash reserve ratio (tem porary m easure to restrain real rate rise).
c. Had the governm ent and RBI allow ed the rupee to rise, instead of weakening,
everything would have worked in reverse direction, causing the subsidy burden to fall
and inflation com ing under severe check. It would have justified lower interest costs. It
would have also helped the governm ent to save on interest expenses on public
borrowing. The budget could have been balanced or significantly im proved resulting into
“higher investm ent rating” of India in international m arket, thereby im proving the
benchm ark interest rates for use by corporate borrowers for their business needs.
d. India never saw low er oil prices in the m arket even when the oil prices fell. The
continuos weaker rupee worked at cross purposes. India never saw petrol or diesel price
below Rs 9 per liter even when the oil prices fell to $9 per barrel.
e. The main enem y was RBI and its consistent policy to weaken the rupee at all tim e.
Reserve Bank of India is the most inefficient monetary institution in India. Alm ost all of
its actions suck and they invariably give “wrong advice” to the Governm ent of India
hurting the whole nation. The surprise is - alm ost all ordinary Indians, intelligentsia,
 critics, analysts and econom ists admire the inefficient and ignorant officials sitting
behind the fortress on the Hornim an Circle in Mum bai without realizing that these guys
or babus are hell bent on hurting the Indian econom y.
RBI is the single m ost institution to m ake the India poor and fritter
away its glorious wealth. Either it should have thorough overhaul or
disbanded altogether.
f. The RBI officials sim ply do not have international exposure in m onetary affairs. RBI
vented out its frustration at one tim e lamenting rise in Forex reserve because it was
unable to m anage it. If China could m anage over US$ 2 trillions of Forex Reserve, why
not RBI m anage just 15% of it - about US$ 300 billions? If these guys can not m anage
the Forex reserve of modest size, they forfeit their rights to m anage India’s econom y.
g. FOREX reserve is m ore like balance in nation’s savings account. Do we want to see our
savings account balance to go lower or higher? Higher of course, then why does RBI
want to reduce Forex reserve by discouraging foreign funds inflow? Only because it is
unable to m anage it?
h. RBI does everything to lower the rupee. Every action sucks and run in that direction. It
lowers the interest rates on NRI deposits, 50% lower than dom estic deposits, so that NRI
do not buy rupee and help it m aintain its weaker rupee stance. W hy? During Forex crisis
in 1992, it was NRI who lent billions of dollars free of security. Even Britain asked for
gold as collateral, NRI did not. NRIs are therefore treated like disposable towels.
3. Asian Crisis, Rupee and Thai Baht exchange rates - Com parison

a. Before Asian crisis, the Rupee was at 36/$ level and Thai bahts at 25/$. After the Asian
crisis erupted, the Rupee sank to Rs 48/$ and Thai Baht fell to 56/$ level on 1Jan98.
However, as of today, the Thai Baht has im proved to THB 32/$ whereas Indian Rupee
has rem ained at sam e level of Rs 48/$. Now, ask yourself
(1) W hich is the better and stronger econom y - Thailand or India?
(2) W here is the maximum m oney flow - Thailand or India?
(3) W hich has the most vibrant stock m arket - Thailand or India?
(4) W hich country has higher GDP growth - Thailand or India?
(5) If that was so, why Thai Baht should appreciate by 42% and Indian Rupee
weaken by 2% ?
 b. It is absolutely clear that these three musketeers - RBI, SEBI and MOF (Ministry of
Finance) have consistently worked against the broader interest of India and entire Indian
population by devaluing the rupee at all the tim e.

4. India’s Debt Level, Debt Servicing and Effect of Indian Rupee exchange rates:
a. The rupee should have been at Rs 26 to dollar level against Rs 48 to dollar now. That is,
appreciation by at least 50% in norm al course.
b. India’s debt at about US$ 120 Billions translate into Rs 576,000 crores @ Rs. 48/$. Had
Rupee seen the rise by 50% , sam e debt would have been at Rs 312,000 crores (@ Rs
26/$) or about Rs 254,000 crores less than what it is now. The interest borrowing cost of
the governm ent in that case could com e down saving alm ost Rs 25,000 crores annually.
c. India could have used part of its foreign exchange reserve to retire at least 50 Billions of
external debt in phased m anner.
d. To earn $ 50 billions from exports, need increase in Export Revenues by $ 500 billions
(presum ing 10% profit m argin and presum ing that not a single dollar goes bad which is
im possible). $ 500 Billions rise in exports? It is 50% of India’s $1 trillion econom y! Does
India have any m ajor industry that could turn in superlative export turnover of $ 500
Billions? Even if it has, who is going to buy in international m arket which is in severe
recession?
e. By letting the Rupee to rise, the national debt level could be reduced significantly that
would raise the rating of the governm ent of India, and also the entire corporate sector.
f. The stock m arkets could also rise by 35% at least, which can be used by the Governm ent
to sell its stake in m any of governm ent owned com panies to realize the cash from the
m arket instead of levying taxes on its citizens. In fact, governm ent could afford to
reduce the taxes of individuals and corporate sector sim ultaneously. That would propel
the m arkets even higher.
g. Lower interest rates, higher rupee, lower im port costs of m ajor inputs such as oil and
coal, lower com m odity prices in rupee term s due to higher rupee reducing the inflation
and higher rupee savings in the hands of individuals and corporate would raise the GDP
to unbelievable double digit level surpassing even China, and also m aking huge am ount
available for key infra structure projects. It will be a “W in-Win” situation for all in India -
Individuals, Corporate and Governm ent itself.

5. W ill EXPORTS be affected?

a. To some extent, som e hard goods m anufacturers m ight be affected but will be balanced
out in 6 m onths or so. Those who want to buy Indian goods, they are going to buy it,
whatever be the price. They are buying goods, not currency. Are not people buying Real
Estates today at whatever price even after 50% rise in property prices? Stark necessities
dictate dem and, not the weak or strong currency.
b. Major export industry is “Software” which is m ainly a service industry. The outsourcing is
not going to stop. If rupee starts rising, those on the sideline m ay have to jum p in and
sign the outsourcing contracts before it is too late. Did India’s software sector lose
competitive edge during BJP rule when the Rupee rose to alm ost 39/$ level, a rise of
20% ? Absolutely not. And those com panies who want to out source, they are going to
use India because it is the only English speaking country with indispensable talents.
c. Higher rupee could also cause m igration of student overseas due to cheaper education by
25% to 50% . There will be less dem and at hom e that would cause corruption cost to
ease. The donations will no longer be necessary because overseas window has opened.
The people will com pare - is it cheaper to study abroad due to firm er rupee or at hom e
with higher cost of corruption? Even governm ent would not m ind higher exchange
allocation to soften the pressure on rupee.

6. Foreign Investm ent to rise..

a. There will be increased m oney flow from overseas. The overseas investors will not only
gain from the rise in equity prices, but will also gain in exchange, m aking return in their
hom e currency alm ost double. They would buy m ore equities or increase FDI (Foreign
Direct Investm ent) that would help m assive power, road, water, ports and infrastructure
com panies.

7. Governm ent of India to benefit m ost..

Governm ent of India will be the biggest winner in “Rupee Rise gam e”. Following are the
advantages for the governm ent:
i. Its oil bill will com e down significantly. Higher rupee m ay also act as “antidote”
against higher oil price.
ii. Oil subsidy level will com e down significantly, m uch faster than the present policy

envisages.
iii. India’s refineries will welcom e the lower rupee. Its purchase cost would be
trim m ed with the result its working capital requirem ent will go lower. The
m argins will widen that would generate positive cash flow for further investm ent.
iv. Nation’s oil explorers like ONGC, GAIL, PETRONET, RIL/Essar can m ake m ore
strategic acquisitions overseas with stronger rupee. Their cost of acquisition
would com e down by alm ost 50% resulting into higher inflow of feed stocks at
cheaper prices. Such benefits could also usher in the era of falling oil prices for
next 10 years in India to the glee of Indian consum ers, Dom estic Airlines and
Auto m anufacturers who would see higher dem and for their vehicles.
v. Indian debt level m ay reduce in rupee term s. Its external debt servicing cost m ay
com e down by 30% at least.
vi. The budget will turn to black with this m aster stroke of changing the
Rupee policy. The governm ent can now think of reducing taxes, rather
than increasing them , getting it desired votes from all consum ers.
vii. There would be no need to pursue the policy of appeasem ent to Scheduled Tribes,
Scheduled Casts and Backward Tribes by following reservation policy any longer.
If they do not vote, other higher ups will vote. Further, the governm ent will have
m ore disposable funds to help those backward com m unities with real fund based
help, rather than displeasing the vast urban com m unity with unfair reservation
policy. The m erits will begin to take hold of every corner of Indian society.
viii. Governm ent of India will becom e one of the richest governm ent in the world.
(1) It holds and controls m ore than 200 state owned enterprises m any of them
are listed entities. No governm ent in the world, including USA, own that
m any listed enterprises.
(a) It was Jawaharlal Nehru who started the industrial revolution by
setting up m assive State Owned enterprises, such as SAIL, Oil
India, ONGC, MMTC, IOC, BPCL, HPCL, HMT, SBI, BHEL etc.
(b) It was again Jawaharlal Nehru who set up the four units of IIT
 (Indian Institute of Technology) that created the hotbed for
m assive IT Sector we see in action today. It is significant to note
that while Nehru created 4 IIT without palpable resource, India’s
subsequent governm ents could create only one m ore unit in last 60
years even with hundreds of thousands of crores.
(c) That is why we call Jawaharlal Nehru as “visionary”. He was the
single m ost person credited with providing m ost affordable school
and higher education. The modest guys like Narayanm oorthy of
Infosys would not have existed without cheap education in his tim e
that was the greatest gift of Nehru.
(d) It was Indira Gandhi, daughter of Nehru, who converted petty sm all
private banks into massive 16 nationalized banks as we see them
today. Count the market cap of all nationalized banks and that of
SBI; you will know what she had created.
(e) Nehru’s vision and book “Discovery of India” should be re-
christened “Rediscovery of India”.
(f) Even Gandhi will sm ile broader than his ghost looking sm ile seen
on Indian Rupee. His dream of uplifting of poor m asses could be
truly realized after 60 years if the currency note on which he is
sitting is allowed to appreciate.
(2) The doubling of stock m arket from present level, influenced by lower
interest rates, higher GDP growth and lower taxes, would alm ost treble the
m arket cap of its controlled enterprises.
(3) It can now afford to dilute its stake and privatize them at m uch higher
prices than now. The budget surplus will simply grow beyond wildest
im agination helping governm ent to reduce the incom e Tax below 16%.
Surcharge on incom e tax or service tax will no longer be necessary.
ix. Roads, Railroads, Ports, Water dam s, Power plants will now be built at m uch
lower cost than ever before. The real prosperity will travel from the coastal areas
to hinterland the way the Chinese econom y has prospered from outside to inside
core.
x. India can then afford to have free float of Indian Rupee to m ake it as m ost
indispensable currency in the world. It could be used as “world’s safest currency”
due to enough backing of gold in India. It is the English speaking country after all
with open dem ocracy. All benefits of open dem ocracy will now be felt with m ore
consciousness than ever before. RBI will have m ore role in m anaging m onetary
policy than inventing econom ic policy which is the core function of the
governm ent or law m akers.

Let India put at rest its disastrous policy on Indian Rupee for good. Let new sym bol start its
journey with the position of strength. Sorry, RBI - this article m ay not be to your taste, but
then, som eone has to bell the cat. Kalidas is honored to do that job.

Anil Selarka (Kalidas)

Hong Kong, 1 st August, 2010

Docum ent Details

Main Statistics Characters 18898; Words 3831; Sentences 246; Lines 347; Paragraphs 86; Pages 7
Document Ref Number 10-006 Date 1Aug2010 Author Anil Selarka Screen Name Kalidas
Official Title ALLOW RUPEE TO RISE Copyrights © 2010 Anil Selarka
Key Words Rupee, India, GDP, Devaluation, Intervention, Strong Rupee, deficits, subsidy, RBI, SEBI, MCX

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