Atul Gupta: Currency-&-Inflation @ Economy2010

Atul Gupta: Currency-&-Inflation @ Economy2010: "The Year 2010 is behind us and hence ideal time to see major activities in our(India) economic system that will define the year ahead for us..."

Currency-&-Inflation @ Economy2010

The Year 2010 is behind us and hence ideal time to see major activities in our(India) economic system that will define the year ahead for us. 

Indian economy can be divided into different sectors namely Industry & Services, Agriculture, Banking & Finance and Energy & Power. All of these sectors in New India are majorly impacted by how Currency Market and Inflation performs. The reason may be that with each passing year India's international/external trade is increasing. It is set to cross $550 billion this financial year with Imports of $350 billion. India's GDP is approx $1.5 trillion and by 2020 it is likely to reach $4.5 trillion. Globalization is the buzz word and its implications are many. Competition and interdependence has increased between world economies. Hence Indian economy can no longer be determined entirely by domestic policies and domestic market performance. We are now rather influenced by domestic as well as international policies and global economic conditions. Best example I can think of is Gold prices and share prices moving in opposite direction before 1990s when economy was not liberal. Today the prices of gold and shares are rising simultaneously.

So I believe that under present scenario the Currency Market and Inflation play a defining role in our Economy. Major factors that influence the Currency Market of a country like India is Interest Rate, Foreign funds, Oil, Polical leadership, Economic data, RBI intervention and Natural calamities. Inflation on the other hand is influenced by Liquidity, Commodity Prices and Food article inflation.

Currency Market: Different currencies react for different reasons. Indian Rupee may depreciate against the USD, while at the same time other major currencies may appreciate against the USD. Many times despite Interest Rate hike by FED, the USD depreciates (though it is suppose to appreciate), primarily due to the release of negative data about current account deficit in the US. Similarly, increase in the Repo rate by RBI results in the INR getting marginally stronger against the USD, but at the same time due to positive data released on the US trade deficit, the USD was still strong against other major currencies. A currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation (Please note that higher inflation have negative impact on currency market). Generally, the more healthy and robust a country's economy. the better its currency will perform, and the more demand for it there will be. Similarly, increasing productivity in an economy should positively influence the value of its currency. The outlook for currency market seems mixed cause of the fact that foreign funds will pour more money in equity market however at the same time inflation & fiscal condition leaving negative impact.

Inflation: Fund inflows from FIIs, higher disposable incomes and tax cuts (putting more money in the hands of customers) has resulted in a surge in liquidity in the economy. Crude oil, metals and precious metals like gold & silver have gone up quite significantly resulting in a cascading effect on commodity prices. Food articles inflation is mainly derived by monsoon. Shortfall in the monsoon last year in one of the main drivers for raising food inflation. However good monsoon resulting in good crop this year coupled with last year's base effect is expected to bring down the inflation rate in next few months. Thus we can conclude that due to high liquidity, commodity prices and food articles inflation, the inflation will remain high and will take time to come under control. The implications of higher inflation impact the interest rates moving them high, stock market sentiments take a hit as borrowing becomes costly and margins decrease, commodities shop up resulting in income categories facing the brunt of rising prices and people with fixed incomes effecting very badly. 

Lastly, here is some interesting data I recently came across:

- Just 50 million people have passport (5% of polulation)  

- Around 2% people participate in the stock markets

- 20% of population (220 million) are bank account holders

- In 2010, India Inc sealed record US$55 billion M&A deals. 

- Mobile phone connections have already zoomed beyond 700 million and are expected to cross 1 billion by 2015.

- Television penetration accoding to industry estimates, will cross the 60% mark by 2020.

- More than  one third of the population is likely to be living in cities and towns by 2020.

- India now has 33% of worlds poor (people earning less than $1.25 per capita per day in PPP dollars).

- It is estimated by the World Gold Council, the premier global institution on all matters on the yellow metal, Indians, including the government, hold an estimated 18,000 tonnes of gold worth some $800 billion now, or 11 per cent of the global holding.