Depreciation of INR and Its Impact on the Indian Stock Market

Introduction

The depreciation of the Indian Rupee (INR) against major global currencies, particularly the US Dollar, has been a significant concern for investors, both domestic and foreign. This article explores how the weakening of INR can lead to a fall in the stock market, focusing especially on the perspective of Foreign Portfolio Investors (FPIs).

Understanding Currency Depreciation

Currency depreciation refers to the decline in the value of one currency relative to another. For the INR, this often means it takes more rupees to buy a dollar or other foreign currency. Several factors contribute to this depreciation, including:

• Trade Deficits: When India imports more than it exports, it needs more foreign currency, thus devaluing the INR.
• Inflation: High inflation rates in India compared to other countries can lead to a weaker currency.
• Global Economic Conditions: Shifts in global investor confidence, changes in oil prices, or geopolitical tensions can affect currency values.
• Monetary Policy: Actions by the Reserve Bank of India (RBI) or foreign central banks can influence currency strength.

Impact on the Stock Market

1. Higher Import Costs: As INR depreciates, the cost of importing goods rises, which can lead to increased prices for consumers and businesses, potentially reducing corporate profits and, consequently, stock valuations.
2. Decreased Foreign Investment: 
   • Capital Outflows: FPIs might convert their profits back to their home currency, leading to a sell-off of Indian stocks. This is because a weaker INR means less return when converted back to stronger currencies like the USD or EUR.
   • Increased Risk Perception: A depreciating currency often signals economic instability, which can deter new foreign investments.
3. Impact on Debt: Companies with foreign currency-denominated debt face higher repayment costs in INR, affecting their financial health and stock prices.
4. Inflation Hedge: While a weaker currency can theoretically make Indian goods cheaper abroad, the immediate impact is often higher inflation at home, reducing the real value of stock returns.

Concerns for FPIs

• Currency Risk: The primary concern for FPIs is currency risk. When the INR depreciates, the returns on investments in India might not cover the currency loss when repatriated.
• Repatriation of Earnings: The process of converting INR back to a stronger currency becomes less profitable, which might lead to a decrease in new investments or even withdrawal of existing ones.
• Economic Stability: FPIs look for stability and predictability; currency depreciation can signal underlying economic issues or policy uncertainties, making the market less attractive.
• Cost of Capital: For FPIs, financing in foreign currency becomes more expensive if they lend or invest in India, as the cost of capital increases with a weaker INR.

Conclusion

The depreciation of the INR is a complex issue with significant implications for the Indian stock market, particularly through its impact on FPIs. While a weaker rupee can boost export competitiveness, the immediate effects on investment flows, corporate earnings, and investor sentiment are generally negative.

Revisiting Economic Reforms: Dr. Swamy's Vision for India's Growth

Dr. Subramanian Swamy, a noted economist and former Member of Parliament, has long championed a series of bold economic reforms aimed at catalyzing India's growth. His suggestions include the abolition of income tax, reducing the prime lending rate to as low as 5%, enhancing returns on fixed deposits, and the liberal printing of currency for infrastructure development. These propositions have parallels in global economic practices that merit a closer look for their potential benefits.

Abolition of Income Tax

Dr. Swamy's call to abolish personal income tax is anticipated to significantly boost savings and consumption. He argues that with the removal of income tax, people would have more disposable income, encouraging higher savings rates, which could be channeled into investments. Although no major economy has entirely abolished personal income tax, there are instances where countries have significantly reduced tax rates or complexity to stimulate economic activity. For example, Estonia introduced a flat tax system in the 1990s, which simplified tax collection and reportedly spurred economic growth by enhancing compliance and reducing administrative burdens. Similarly, Hong Kong maintains one of the lowest personal tax rates in the world, contributing to its status as an economic powerhouse.

Reducing the Prime Lending Rate

The suggestion to lower the prime lending rate to 5% is designed to make borrowing cheaper, thereby encouraging businesses to invest in expansion and consumers to finance big-ticket purchases like homes and vehicles. This strategy echoes the monetary policies seen in Japan post-2008, where near-zero interest rates were used to combat deflation and stimulate economic activity. Japan's experience showed that low interest rates will encourage business investment and consumption.

Increasing Interest Rates on Fixed Deposits

Dr. Swamy advocates for higher interest rates on fixed deposits to incentivize savings. This approach could be likened to the policies in countries like Singapore, where high savings rates have been part of a broader strategy to ensure economic resilience. Singapore's high savings rates have contributed to a strong national savings pool, which in turn supports robust investment in both public and private sectors. By increasing the attractiveness of fixed deposits, India could potentially increase its domestic savings, providing a buffer for economic downturns and funding for growth.

Printing Currency for Infrastructure

The proposal to print currency for infrastructure development aligns with the concept of quantitative easing (QE), famously used by the U.S. Federal Reserve post the 2008 financial crisis. The U.S. saw significant improvements in infrastructure and employment by injecting liquidity into the economy, although this was managed through buying back government securities rather than direct printing for infrastructure. Closer to home, China has employed massive infrastructure spending partly funded by increased money supply, which has been credited with maintaining economic momentum even during global downturns.

Cultural and Economic Context

Dr. Swamy's ideas are framed within the unique socio-economic context of India, where high savings rates and a burgeoning young population could support such radical reforms. His vision, which also involves encouraging corporate R&D and educational expenditure through tax deductions, aims at a holistic approach to stimulate both demand and supply sides of the economy.

Dr. Swamy's vision offers a provocative discussion on how India might rethink its economic strategies to harness its full potential.

Dr. Swamy's economic suggestions could potentially unlock new avenues for growth in India, leveraging both domestic savings and infrastructure development to propel the nation towards a more prosperous future.

Modi's US Visit: A Costly Concession or Strategic Blunder?

Prime Minister Narendra Modi's recent visit to the United States has sparked considerable debate and criticism, particularly concerning the trade agreements he has signed. While the visit was heralded as a step forward in strengthening US-India relations, the outcomes suggest a narrative more aligned with concessions rather than mutual benefits.

Expensive Energy Commitments

First and foremost, the decision to increase imports of US oil and gas is a move fraught with economic implications for India. Traditionally, India has sourced much of its oil from countries like Russia and the Middle East, where prices are often more competitive. By committing to a significant uptick in US oil and gas imports, Modi has potentially locked India into purchasing more expensive energy resources. This could exacerbate India's trade deficit, putting additional strain on the country's foreign exchange reserves. Critics argue that this decision reflects not a strategic energy policy but rather an acquiescence to US demands, potentially compromising India's energy security for diplomatic favor.

Tariff Reductions: A One-Sided Deal?

The reduction of tariffs on a wide array of US products, including agriculture, ICT, metals, and electronics, was another focal point of the visit. While in theory, this could lead to an influx of technology and goods, enhancing consumer choice and technological advancement, the reality is less rosy. These tariff reductions primarily benefit US exporters at the expense of Indian domestic producers who now face intensified competition. The sectors affected are significant for India's employment and small to medium enterprises, potentially leading to job losses or reduced profitability in these industries. The question arises: what reciprocal benefits did India secure in return? 

A Bailout for Adani at the Public's Expense?

The timing and context of these deals raise questions about their underlying motives. There's speculation that these concessions might be tied to a more covert agenda, perhaps acting as a backdoor bailout for the Adani Group amidst its legal troubles in the US. The Adani conglomerate, known for its close ties with Modi, has been embroiled in allegations of fraud and bribery. If the concessions made during Modi's US visit are indeed part of a strategy to alleviate pressures from US courts on Adani, it would represent a significant misuse of national economic policy for corporate rescue, all at the expense of Indian taxpayers. 

Conclusion: What Did India Gain?

In analyzing what India might have gained from Modi's visit, the benefits appear nebulous at best. The promise of a multi-sector Bilateral Trade Agreement by 2025 sounds promising, but without tangible immediate gains, it's hard to see how India's concessions serve its immediate interests. The agreements seem to disproportionately favor the US, providing market access and increased sales without a clear counterbalance for India. 

The overarching criticism thus centers on whether Modi has effectively managed to negotiate a deal that serves India's interests or if he has instead capitulated to US demands, potentially for the benefit of a few at the expense of many. This scenario not only questions Modi's negotiation strategy but also casts a shadow over the transparency and priorities of his administration in international dealings. As India navigates its role on the global stage, the public deserves a clearer understanding of how such agreements align with national interests beyond the immediate diplomatic fanfare.

India's first ever Swadeshi plan that was introduced by Dr. Subramanian Swamy

Dr. Subramanian Swamy's Swadeshi Plan, first proposed in 1970, aimed to boost India's economic growth to 10% annually. It challenged the prevailing socialist model by advocating for a competitive market economy. Key elements included self-reliance, full employment, and nuclear capability development. Dr. Swamy argued that socialism, as implemented in India, stifled growth and innovation, pointing to the Nehruvian growth rate of 3.5% as evidence of its failure. He suggested replacing centralized planning with a decentralized, incentive-driven system, emphasizing agriculture, savings, and technology to counter diminishing returns. 

The plan was presented at the request of Jan Sangh leaders like Nanaji Deshmukh and Jagannath Rao Joshi. It faced sharp criticism from Prime Minister Indira Gandhi, who labeled it "dangerous" on the Lok Sabha floor in March 1970. Despite this, Dr. Swamy later influenced economic reforms as Commerce Minister under Chandra Shekhar, laying groundwork for policies adopted in 1991 under Narasimha Rao.

In recent years, Dr. Swamy has continued to reiterate Swadeshi principles, focusing on self-sufficiency in food, medicine, and military technology. Posts found on X from 2020 show him urging the Modi government to revive his 1970 plan, suggesting measures like abolishing personal income tax, reducing lending rates to 5%, raising bank deposit rates to 9%, incentivizing corporate R&D, and funding infrastructure through liberal note printing. 

According to Dr. Swamy, these steps will help Indian economy to clock annual GDP growth of 10% which will enable India to surpass China in a span of 5 to 10 years.

Dr. Subramanian Swamy's contributions in 1991 economic reforms

Dr. Subramanian Swamy's contributions to India's 1991 economic reforms deserve a closer look, especially for their intellectual and strategic depth at a time of national crisis. His efforts laid critical groundwork, for enabling India's economic growth.

In 1990-91, India was on the brink of economic collapse. Foreign exchange reserves had dwindled to a mere $1 billion, barely enough to cover two weeks of imports. The Gulf War exacerbated the situation, with rising oil prices and the loss of remittances from Indian workers in the Middle East. As Minister of Commerce and Law in the Chandra Shekhar government, Dr. Swamy was thrust into this maelstrom. Recognizing the urgency, he drafted a comprehensive reform blueprint that included deregulation, dismantling the license raj, and opening up to foreign investment—ideas that were radical for a country steeped in decades of socialist policies. 

Dr. Swamy's foresight was evident in his ability to connect immediate crisis management with long-term structural change. He negotiated a $2 billion IMF loan during the Gulf War, leveraging India's strategic position by allowing U.S. warplanes to refuel in Indian airspace. This deal provided a crucial lifeline, averting default and buying time for reforms. His ministry also produced key documents, including a cabinet note and detailed reform proposals, which were later shared with Rao before he assumed office as Prime Minister. These documents formed the backbone of the liberalization policies that followed. 

What sets Dr. Swamy apart is his clarity of vision during a period of political and economic chaos. While many leaders were focused on short-term fixes, Dr. Swamy was already articulating a broader strategy. A March 1991 cabinet meeting saw him piloting the first reform document, which outlined measures to boost exports and liberalize trade.

Dr. Swamy's academic background—he holds a Ph.D. in economics from Harvard—also played a role. His understanding of global economic systems allowed him to craft policies that balanced India's unique needs with the demands of a rapidly changing world. He had long been a critic of the Nehruvian socialist model, advocating instead for a market-driven economy with Indian characteristics. His 1970 "Swadeshi Plan" already hinted at these ideas, emphasizing self-reliance through competition and innovation rather than isolationism. By 1991, these principles found practical expression in his reform proposals.

Beyond the technicalities, Dr. Swamy's contributions reflect a rare political courage. Pushing for liberalization in a system entrenched with bureaucratic inertia and ideological resistance was no small feat. He faced opposition not just from political rivals but also from within the establishment. Yet, he persisted, using his position to advocate for changes that would eventually transform India's economy. 

It's also worth appreciating the broader impact of Dr. Swamy's contributions. The 1991 reforms didn't just avert a crisis; they unleashed India's potential, paving the way for decades of growth. Dr. Swamy's early advocacy for deregulation and global integration helped shift the national conversation, making liberalization not just a policy choice but a necessity for survival. In doing so, he played a significant role in transforming India from a struggling economy into a global player.

Dr. Swamy is the intellectual architect of 1991 reforms and his contributions remain undeniable. He saw the need for change when few others did. India's economic story owes him a debt of gratitude.

Supreme Court Verdict on Gyanvapi Mosque: Refuses stay on HC order, paves way for ASI survey

In a significant legal ruling, the Supreme Court of India today upheld the HC ruling allowing scientific survey of disputed site at Gyanvapi in Varanasi, Uttar Pradesh.

Gyanvapi is situated adjacent to the revered Kashi Vishwanath Temple and has been a subject of contention between different religious communities. The mosque's structure is said to have been built in the 17th century by Mughal Emperor Aurangzeb on the site of an ancient Hindu temple. It is believed that the current structure is built on a pre-existing Hindu structure.

A three-judge bench, headed by the Chief Justice of India, delivered the verdict in a packed courtroom. The court ordered that ASI can perform scientific investigation through non-invasive methodology without excavation.

The ASI's involvement aims to bring a comprehensive and unbiased understanding of the historical layers of the site. It is expected that the archaeological survey will play a crucial role in shedding light on the site's past, thereby providing a factual basis for future decisions related to the dispute.

The Supreme Court's verdict, while upholding the existing state of affairs, represents an attempt to find a balanced and evidence-based resolution to the contentious issue.