FY 2022: THE YEAR OF RUPEE DEPRECIATION
I might have started the blog on a happy note, but I am going to spoil the mood. The topic for today's blog is one that not only bothers our pockets, but also affects the pockets of our economy. You might have guessed it from the image above. Yes, we are going to talk about Rupee depreciation.
For those who don't know what currency depreciation is, it is when the value of the home currency decreases as compared to the foreign currency. In short, it is when the value of the rupee decreases as compared to the foreign currency. We experience a decrease in purchasing power when a currency depreciates. But why am I talking about rupee depreciation at the beginning of a new year?
In FY 2022, Indian rupee depreciated 10% against the dollar. This isn't the first time that the Indian rupee has depreciated against the dollar. In fact, the Indian rupee has been depreciating since 1947. We all might have hallucinated once about 1 rupee being equal to 1 dollar. And this was true back in 1947. Since then, on yearly basis, the India rupee has always lost its value. On average, the Indian rupee has depreciated by 6.9% against the dollar.
Currency depreciation has its own advantages as well as disadvantages. Talking about the disadvantages, our imports get costlier. The amount of debt that India owes to international organizations increases in value. As we talked earlier, we experience a decrease in purchasing power. As a consequence, we now have to pay inflated prices for the same amount of goods. When a currency loses value, it either depreciates or becomes devalued. While the currency depreciation is a consequence of external factors, currency devaluation can be voluntary. The Indian government, in the past, has voluntarily devalued the Indian rupee. This was done so as to temporarily pay off our debts. We can devalue a currency by printing more money.
Talking about the advantages, our export rise. As a nation, we are able to produce finest quality products at cheaper rates. This is what the world wants. Countries like India are among the developing nations that are trying new ways to increase their exports. Voluntary devaluation or depreciation of rupee can be beneficial, but only to an extent. Excessive depreciation or devaluation can lead us on a path upon which countries like Venezuela, Greece, Argentina, and Turkey are walking. Turkey's annual rate of inflation has touched 84.4%. In case of Argentina, the annual inflation rate is just 215%.
India, at one point, had almost started walking on the same path as Argentina and Greece. The year was 2013 and Indian markets were facing the consequence of 0% customs and import duties on Chinese goods. The US had conducted the tapering tantrum. Tapering tantrum is a south Bombay word for playing with the interest rates. Increasing or decreasing the interest rates so as to control the liquidity in the economy is called as tapering tantrum. The 2013 tapering tantrum was unexpected and hence India and foreign investors panicked.
FIIs started the selling spere. The demand for dollar increased and hence rupee started depreciating. The depreciation was so bad that the rupee lost 15% against the dollar in just 9 months. India's dependency on oil imports become critical. The demand for oil was increasing and on the other hand, the oil rates were touching the clouds and so was dollar. To control the depreciating rupee, RBI needs to sell the dollar that they own as foreign reserve. But, on the other hand, we required the dollar to buy oil. The Imports were increasing, and our forex reserves were decreasing. The rupee was on fire. It was a mess.
I had started writing about the Indian railways but then I derailed, and I thought that rupee depreciation is something that we talk about but tend to ignore how important it is. My mentor, Mr. Charlie Munger says that tell me where I am going to die so I won't go there. Simple, isn't it? the only way in which India can lead towards misery is this scenario. The rupee depreciation, high import bills, loosing forex reserves so as to stabilize the falling rupee, increasing oil rates, high trade deficits and low exports would definitely lead us towards misery. And this is exactly what we are going through right now. Last year, the RBI intervened the forex market and sold $100 billion dollars so as to stabilize the falling rupee. $100 billion as of now is equivalent to Rs 8 lakh Cr. It's almost equal to the market cap of HDFC bank. Still the rupee touched the lifetime high of 82.63. If it weren't the RBI, rupee would have definitely touched 100 against the dollar.
As of today, our current account deficit is just increasing. The rupee is not stabilizing, and our exports are not that high so as to compensate the falling rupee. We, as retail investors, are on our own. We "NEED" to invest wisely so as to offset these circumstances. I would like to give you an example so as to tell you how important this is and what am I trying to convey. Let's say my yearly returns are 20%. According to FY 2022 data, let's consider the inflation to be 7% and let's say the rupee depreciated 10%. On nominal basis, your returns are clear cut 20%. But, on real basis, that is considering all the above-mentioned factors, your annual return boils down to 3% [20% yearly return - (10% depreciation + 7% inflation)]. According to the rule of 72, it will take 24 years to double your money if your returns stay at 3%.
This is what I was trying to convey. Investing is an art. You need to work on that skill so as to develop that art. It requires time and effort but, guess what? So does growing your money. Not everyone is born to master this art. Hence, instead of trying your luck in the markets, I would suggest you all find an artist who can grow your hard-earned money and has the ability to beat the inflation and depreciation rates on an annual basis. Life becomes easy when you delegate few tasks. You might not know but I can be that artist.
All the best for 2023 and once again, Happy new year.
Comments
Post a Comment