postaday | wealthymatters

The Story Of The Falling Rupee

August 22, 2013 3 Comments

wealthymatters Even after independence in 1947,the Indian Rupee was still pegged to the British Pound. The peg to the Pound was at INR 13.33 to a Pound which itself was pegged to USD 4.03. That means, officially speaking the USD to INR rate would be closer to Rs 4. In 1966,the Rupee was devalued and was now directly pegged to the US dollar at INR 7.50 per Dollar. Till 1966, the Indian currency, which was pegged to the British pound, was an officially or unofficially acceptable tender over a large part of Asia and Africa, from Beirut to Hong Kong.After the devaluation, the Rupee suddenly turned a global pariah, with few takers anywhere.Exports did not surge as expected and Indian financial prestige suffered even further.

By 1985, India had started having balance of payments problems. The rupee had by then been depreciated to about 17/$ in the intervening 2 decades,By the end of 1990, the country was facing a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance three weeks’ worth of imports. India had to airlift its gold reserves to pledge it with International Monetary Fund (IMF) for a loan.In 1991,overnight the Rupee was devalued by another 50% from about 17/$ to about 25/$. In 1993,the government allowed the Rupee to be traded by traders without a forced peg and it started to slide as the government was no longer controlling the prices, fully and started to reflect the reality. From about 27/$ it slid to Rs.35/$ by 1997. Read more of this post

Filed under Alternative Assets, Paper Assets Tagged with Asian financial crisis of '97, depreciating rupee, European sovereign debt crisis, falling rupee, financial crisis of 2007-2008, historic rupee dollar exchange rate, pledging gold with IMF, postaday, sanctions, sinking rupee

The Indian Rupee And The General Elections

August 21, 2013 2 Comments

wealthymatters History shows that after liberalization,the Rupee falls ahead of the general elections.For example,in 1996, the rupee depreciated by nearly 10% in the 12 months leading up to the elections. And in 2009, it fell by 18% in the run-up to the polls.

Economist’s explain this phenomenon by pointing out to the governments’ tendency to overspend to satisfy various vote banks as elections approach. This unproductive expenditure causes the Rupee to depreciate, which then forces the government to intervene and try to prop up the currency.

Lay people have a more interesting take on the matter:the money of the political class stashed abroad is brought back to fund elections. A weak rupee means politicians and others bringing back the money are able to get a greater bang for their buck, and it is in their interest that the Rupee remains weak during this period. Read more of this post

Filed under Alternative Assets, Tool Kit Tagged with depreciation of the rupee, fall in Indian rupee before elections, falling rupee, postaday

A Little Math To Wealth

August 21, 2013 2 Comments

During the early part of the eighteenth century, the French government issued a series of bonds to help raise money. With the decline of the French economy in the 1720s, they were forced to cut the interest rates on the bonds, which drastically diminished the market value of said bonds. This resulted in the French government having considerable difficulty in raising money via new bond sales.

Le Pelletier-Desforts, Deputy Finance Minister for France, had a “brilliant” idea as to how to raise the value of existing bonds, encourage the sale of new bonds, and earn some money for the government- a trifecta. His idea was to allow bond owners to buy a lottery ticket linked to the value of their bonds (each ticket costing 1/1000th of the bond’s value). The winner would get the face value of their bond, which was much more than what they could get on the market, plus a ‘jackpot’ of 500,000 livres, which would make the winner instantly insanely rich- essentially set for life.

Unfortunately for the government, the mathematics behind this new fundraising scheme was vastly flawed. If a person owned a bond worth a very small amount, with the lotto ticket for the bond costing just 1/1000th of the value, he/she could buy the lotto tickets extremely cheaply, yet their lotto ticket had just as much of a chance of winning as someone who owned a bond for 100,000 livres and had to buy their ticket for 100 livres. The mathematician, de la Condamine realized that if he was able to buy up a large percentage of the existing small bonds, split into 1,000 livres a bond, he could then buy each lotto ticket for just 1 livre. If he owned enough of these small bonds, he could quickly give himself the bulk of the entrees in the lotto while spending much less than the jackpot, thus assuring he’d win quite often and always win much more than he put in. Read more of this post