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.
Currency and Inflation are related. If government prints more currency, the value of currency will go down and there will be inflation. I want to know how the goverment decides - how much currency to print!
ReplyDeleteHow much currency to be printed depends on the money supply in economic system. RBI which is the Central Bank of India has the sole power to issue currency and through its monetary policy regulates the money supply. Repo Rate, Reverse Repo Rate, Cash Reserve Ratio are tools to tune the money supply in the system and can be controlled efficiently.
ReplyDeleteHigh liquidity may leads to high inflation and hence negative impact on currency market. So to control excess liquidity in economic system, RBI increases Repo Rate (rate at which our banks borrow rupees from RBI) which makes credit costly and increases the CRR (amount of funds that the banks have to keep with RBI) to drain out the excessive money from the banks. This kind of measures by RBI can only control the inflation to a certain extent only.
dear Atul, having gone thru your article few things came into my mind:
ReplyDeletein a country where more than 180000 farmers have committed suicides in the recent past (chilling isn't it ?), where an avg family gets about 100kg of food p.a.less than in the 1990's, where child nutrition (47% children below 3 years are malnourished)is at par with sub saharan Africa, where an innocent nam can booked under our draconian laws without any hopeor justice and may languish and rot for several years this is not growth or "India Shining" as many political parties may make us believe.
some figures like the world's largest milk
producer or the GDP growth in absolute terms or the growth in telephony, s/ware or the insurance sector loses its meaning since this is the minimum which was supposed to happen in a country with a growing and a huge population anyway. the real growth would be when it becomes "all inclusive" and we ensure that don't have some "have nots" who have got left behind. we need to steer very clear of the dangerous games which our leaders play to keep communities divided and make the society compounded with stunted intellectual growth. till such time our country is administered by colluding politicians, the state machinery, the corporates and the media - all hand in glove we shall continue to get manipulated. the answer is to get together and try improving the lot of have nots at the micro level around us and spread awareness - till then continue living in a sham democracy where you see a hungry child who begs (again part of a colluding gang of criminals and state officials)-palm outstretched in front of a luxury car where some man in a Versace suit in a climate controlled environment reads economic times wondering if he will be able to catch the flight due in 2 hrs time amidst all this humdrum outside.
Hi Atul, It is nice but on few things i personally disagree, reason is we can not compare our economy with a country like USA.I think there are lot many factors that influence a country's economy like distribution of money among people, their policies the resources how they are used that are available in that country and the law of demand and supply.
ReplyDeleteIf we talk about GDP and per capita income it has been increased but how many people are get benefited by that in India.If we look around people have phones but that are not able to afford food for themselves.
I know one thing that economists say that inflation is always better at least you get one time meal.....and its a cycle in every economy that continues.