Why Rupee [INR] depreciates against dollar [topics: business, currency depreciation, economy, PPP and CCP] 1

DSP BlackRock Mutual Fund  asks this on Linked In

Hello fans, If USD 1 could buy you 45 rupees 10 yrs ago, today it could buy you more than 53 INR. This means that the rupee has depreciated against the USD. Do you think the rupee will depreciate further?

I think the following answer. I think its quite likely that INR will continue to depreciate not just for the next decade but for the ensuing decades as well.

Why?

Some people cite the so-called PPP [purchasing power parity] as a viable answer to the paradigm of international currency conversion. But I think its merely less well thought. First off while conceptually PPP is a viable and more fair conversional adjustment its not followed by spirit and letters. What is followed by spirit and letter is the currency conversion parameter. Its much like talking about a conceptual airplane [PPP]  Vs one that is realistic [CCP].

A PPP emerges from the idea of prices of commodities. If I can buy a commodity at a cheaper price the currency of a foreign country can be leveraged for more buying or purchasing power. So if I get my salary in a stronger currency and at the same time use it to buy commodities in a nation where the currency is weaker I can buy much more than the CCP allows me. Its only in this situation PPP has a meaning. PPP is an economic relativism. Where as CCP is a transactional relativism which is merely absolute in the time span in which CCP has a fixed value. If CCP does not fluctuate much the CCP relativism has transpired into CCP absolutism which is where much transactions of international trades occur. To make PPP a more foundational parameter one has to find a good PPP value which is almost an impossible job which is why there is CCP.

Why is PPP impossible to achieve, at-least comprehensively? Because of every reason: commodities and their manufacture properties, the market-nature of a commodity, international trade and social politics and what not. Economic organizations and Banks and trade-orgs and companies can merely learn this gradually and implement them with caution and wit but not devise a comprehensive PPP absolute value even as a functional dependence. They can only do so based on a particular commodity. When all commodity properties are known only their values can have a determinable PPP value.

eg Cauliflower is sold at INR 10 in India, lets say, then you can buy 5 cauliflower in 1 dollar. 1 dollar lets you buy only 1/2 cauliflower in the USA as the price of this commodity is about 2 $. Same goes with “atta” = wheat flour and so on. There is a PPP value for each of these commodities which needs to be all taken into account to find a gross PPP between countries and these commodities are variables, so PPP is variable. India is an onion republic, onion price shoots to 50 from 10 INR and governments are toppled. I wish opinions can also be like that.

But what one does not easily realize if not told is flour, carrots, onions and cauliflowers are low-end commodity in a price distribution function of PPP. But Cars, housing-materials, electronic gadgets and so on are high-end commodities. So a few cars offset millions of low-end commodities to bring the dominance of powerful currencies even on PPP value, not just CCP value. The same car is sold at 10,000 $ in USA when its sold at 14,000 – 15,000 $ in Indian market. Same goes with laptops and camera, there is at-least a 150% price excess for the exact same brand in US and India. Naturally this keeps the CCP and PPP of US more powerful against that of India. But this is not necessarily so for US Vs Japan, because Japan also manufactures very high-end patent free, trade restriction free materials and products. As long as India is not a truly manufacturing and knowledge based economy the obvious commercial implications will be exploited by mature and powerful economies.

I think this is fundamentally a bottleneck and INR keeps depreciating.

One comment

  1. Pingback: Why is Indian Rupee (INR) depreciating? | Chok Leong's Thoughts

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