Rationale for Rs 100/USD rate

Many reasons have been cited for the Rupee decline.  They say it's the fed ending it's bond purchase program, India's CAD, Fiscal policy, monetary policy, etc. 

All of the above are valid, but not entirely new.  What triggered this entire mess what the liquidity crisis in China last month because of bad loans in China.  The Overnight Lending Rate shot up to exponentially  (I don't have the data/figures handy so do your own googling).  This was unrelated to the Fed buyback program, but it happened to have happened on the same day.  When the Overnight yields shot up in China, it immediately triggered an increase in yields in the 10 year US Treasuries (thanks to quant traders and computerized dominoes).  This, in turn, pushed the USD against all currencies.  India, being lower on the totem pole, took a bigger hit.  Then there was a flurry of shitty policy announcements from RBI and government.  This spooked investors further and the selling continued.

However, the damage has reached escape velocity.  The move has been too sudden and businesses haven't adjusted to the new reality.  In a month, the extent of the carnage will become increasingly evident.  The government will have to either raise fuel prices, which is going to drive inflation even higher, issue oil bonds to subsidize the Oil Marketing companies, or shut down the oil companies and ration oil.  There are no good options. 

Another festering problem is going to face it's "Lehman Moment" very soon.  SBI overnight repo rates have shot up, which indicates a huge problem with bad loans.  The RBI is allowing Indian banks to mark bond prices at Face Value rather than at Market value.  This provides them with a loophole around the Reserve Ratios.  Without that move, SBI would have to sell assets into a falling market to bolster it's balance sheet; which would beget more selling.  While RBI may have avoided a market panic, the long-term balance sheet issues with banks is VERY REAL.  Indian banks are sitting on a pile of worthless paper from Industrial loans and not consumer loans. 

If my guesstimate is valid and there IS indeed SBI has a 'Lehman moment', the country is fucked.  There will be a bank run and people will be lined up outside banks to withdraw money, while the Rupee spirals out of control triggering a hyperinflationary (prices rising 100% overnight) attack.  Stores will shut down.  Banks will shut down.  Gas stations will shut down.  There will be rioting and pillaging.  There will chaos and anarchy.

Under any circumstance, it's highly likely that S&P and Moodys will downgrade Indian bonds to the "worthless pile of crap" category.

there is enough gold in tirupati alone to shore up the rupee and reduce CAD. all the govt. has to do is issue paper gold bonds to tirupati. the govt. could issue paper gold bonds under an (income tax) amnesty scheme to the general public too.

Huzefa Kapasi wrote:there is enough gold in tirupati alone to shore up the rupee and reduce CAD. all the govt. has to do is issue paper gold bonds to tirupati. the govt. could issue paper gold bonds under an (income tax) immunity scheme to the general public too.

This is a valid argument and a high-likelihood scenario.  This is surreptitious gold confiscation. 

I don't know how the public will react if the Indian government tries to touch the gold in Tirupathi.  My guess is that there will be national riots.  The immunity scheme is quite likely, but it all depends on what you get back from the government.  There is an implicit assumption that people will surrender (or trade) in their gold to get an ever-depreciating rupee.  They might do that because they are financially strapped and need to raise cash rather than to get a return on their investment.  However, it's likely that the government would be able to offer a better rate than the jewelers. So this scheme might be successful.  But remember, RBI has the printing press (not the jewelers), so they can carry out this hoax of a scheme.

harharmahadev wrote:
I don't know how the public will react if the Indian government tries to touch the gold in Tirupathi. 

it requires a resolute and determined administration to do this. when the push comes to shove, the govt. is  likely to act.

The immunity scheme is quite likely, but it all depends on what you get back from the government.  There is an implicit assumption that people will surrender (or trade) in their gold to get an ever-depreciating rupee.  They might do that because they are financially strapped and need to raise cash rather than to get a return on their investment.  However, it's likely that the government would be able to offer a better rate than the jewelers. So this scheme might be successful.  But remember, RBI has the printing press (not the jewelers), so they can carry out this hoax of a scheme.

the primary inducement is conversion of black money to white. no interest is to be paid by the govt. on the gold (tax free capital gains acrue to you). it is a very strong inducement. it's been tried a couple of times in the past with great success.

Huzefa Kapasi wrote:

the primary inducement is conversion of black money to white. no interest is to be paid by the govt. on the gold (tax free capital gains acrue to you). it is a very strong inducement. it's been tried a couple of times in the past with great success.

If that's the case, why go for gold?  Anybody hoarding cash should be able to deposit it into the bank and convert it into white money.  Basically, if I provide a blanket amnesty for tax evasion, it will obviously be a huge success in a country where corrupt people have all the money.  The politicians and their cronies will gain the most from it.

harharmahadev wrote:

Huzefa Kapasi wrote:

the primary inducement is conversion of black money to white. no interest is to be paid by the govt. on the gold (tax free capital gains acrue to you). it is a very strong inducement. it's been tried a couple of times in the past with great success.

If that's the case, why go for gold?  Anybody hoarding cash should be able to deposit it into the bank and convert it into white money.  Basically, if I provide a blanket amnesty for tax evasion, it will obviously be a huge success in a country where corrupt people have all the money.  The politicians and their cronies will gain the most from it.

gold is not comparable to cash. this scheme is for dire situations for it encourages the public to evade taxes.

Huzefa Kapasi wrote:


gold is not comparable to cash. this scheme is for dire situations for it encourages the public to evade taxes.

I obviously understand. My point is that if the govt provides a gaping loophole for tax evasion, then it will obviously be successful.  If gold is the way to do it, I will convert my black money to gold and then sell it to the govt.

harharmahadev wrote:If gold is the way to do it, I will convert my black money to gold and then sell it to the govt.

yes. this is what is likely to happen. but that significant portion of gold held by individuals in the form of (unaccounted) investment is also expected to get liquidated; meaning that the scheme is a trade-off.

Huzefa Kapasi wrote:

harharmahadev wrote:If gold is the way to do it, I will convert my black money to gold and then sell it to the govt.

yes. this is what is likely to happen. but that significant portion of gold held by individuals in the form of (unaccounted) investment is also expected to get liquidated; meaning that the scheme is a trade-off.

 I don't understand the rationale.  Where is the trade-off?  Are you saying the investment gold will be forcefully converted and liquidated (meaning confiscation)?

Huzefa Kapasi wrote:

harharmahadev wrote:If gold is the way to do it, I will convert my black money to gold and then sell it to the govt.

yes. this is what is likely to happen. but that significant portion of gold held by individuals in the form of (unaccounted) investment is also expected to get liquidated; meaning that the scheme is a trade-off.

>>>>On  a related note, do you have a sense of when this will bottom out (taking into consideration any governmental measures afoot now)? I am thinking this may be the time for me to reduce some liabilities in India with dollars.

Kris wrote:

Huzefa Kapasi wrote:

harharmahadev wrote:If gold is the way to do it, I will convert my black money to gold and then sell it to the govt.

yes. this is what is likely to happen. but that significant portion of gold held by individuals in the form of (unaccounted) investment is also expected to get liquidated; meaning that the scheme is a trade-off.

>>>>On  a related note, do you have a sense of when this will bottom out (taking into consideration any governmental measures afoot now)? I am thinking this may be the time for me to reduce some liabilities in India with dollars.

i think it has bottomed out (going by today's rebound and news reports). as the FM said the rupee is currently undervalued. some financial houses have predicted that the rupee will regain to 61 level in 6 - 12 months.

Huzefa Kapasi wrote:

Kris wrote:

Huzefa Kapasi wrote:

harharmahadev wrote:If gold is the way to do it, I will convert my black money to gold and then sell it to the govt.

yes. this is what is likely to happen. but that significant portion of gold held by individuals in the form of (unaccounted) investment is also expected to get liquidated; meaning that the scheme is a trade-off.

>>>>On  a related note, do you have a sense of when this will bottom out (taking into consideration any governmental measures afoot now)? I am thinking this may be the time for me to reduce some liabilities in India with dollars.

i think it has bottomed out (going by today's rebound and news reports). as the FM said the rupee is currently undervalued. some financial houses have predicted that the rupee will regain to 61 level in 6 - 12 months.

>>>Thanks.

harharmahadev wrote:

Huzefa Kapasi wrote:

harharmahadev wrote:If gold is the way to do it, I will convert my black money to gold and then sell it to the govt.

yes. this is what is likely to happen. but that significant portion of gold held by individuals in the form of (unaccounted) investment is also expected to get liquidated; meaning that the scheme is a trade-off.

 I don't understand the rationale.  Where is the trade-off?  Are you saying the investment gold will be forcefully converted and liquidated (meaning confiscation)?

no, no confiscation. trade-off in the sense that such a scheme will,  a) lead to a surge for gold demand (people will want to convert black money to gold) which will lead to higher imports and smuggling, and b) such a scheme will set a bad example to honest tax payers. on the other hand, such a scheme will, a) unlock gold reserves, and b) unlock black money. most of the individual gold reserve in india is in black anyway.

[quote="Huzefa Kapasi"
no, no confiscation. trade-off in the sense that such a scheme will,  a) lead to a surge for gold demand (people will want to convert black money to gold) which will lead to higher imports and smuggling, and b) such a scheme will set a bad example to honest tax payers. on the other hand, such a scheme will, a) unlock gold reserves, and b) unlock black money. most of the individual gold reserve in india is in black anyway.[/quote]
How do individuals account for gold they inherited from their forefathers. Most dont have record, and how would one differentiate black Gold and inherited Gold?

Marathadi-Saamiyaar wrote:
How do individuals account for gold they inherited from their forefathers. Most dont have record, and how would one differentiate black Gold and inherited Gold?

i really don't know. these are back calculations i'd reckon. considering most indian gold consumption is funneled by imports, it would be easy to measure the import-export gap and mark it as the reserve for that year regardless of the fact if it was ultimately stored as black or white. add to that a guess of the smuggled quantity for that year. ancestral gold -- no idea how they calculate that reserve. the figure (total gold reserve) varies between 15,000 to 25,000 MT for india (for USA it is 14,000 MT). regardless, 15,000 MT is the most conservative estimate. the fact that only 500 MT of it is held by the RBI makes you fall from your chair!

edit. undisclosed ancestral gold is unaccounted or black money. also, jewellery you are wearing on your person need not be accounted (that is a huge chunk of "legitimate black money" stored as gold jewellery). that is why you see these babas and netas wear fat gold necklaces studded with diamonds with impunity.

Huzefa Kapasi wrote:

Kris wrote:

Huzefa Kapasi wrote:

harharmahadev wrote:If gold is the way to do it, I will convert my black money to gold and then sell it to the govt.

yes. this is what is likely to happen. but that significant portion of gold held by individuals in the form of (unaccounted) investment is also expected to get liquidated; meaning that the scheme is a trade-off.

>>>>On  a related note, do you have a sense of when this will bottom out (taking into consideration any governmental measures afoot now)? I am thinking this may be the time for me to reduce some liabilities in India with dollars.

i think it has bottomed out (going by today's rebound and news reports). as the FM said the rupee is currently undervalued. some financial houses have predicted that the rupee will regain to 61 level in 6 - 12 months.

If you are relying on Chiddu or Manmu for financial advise, you are doomed.  Those assholes are either clueless, at best, or deliberately misleading the people.

Rupee may have a dead-cat bounce to 61, but that's a dangerous game to play.  I would highly recommend diversifying out of the Indian Rupee to US Dollar, Swiss Francs and Gold.  Even Singapore Dollars may be a stable option.

Gold scheme may be successful, because the government is likely to provide a better rate than jewelers + the option of converting black into white.  The gold will be used as collateral to buy foreign exchange (similar to what they did during the Balance of Payment crisis of 1991).  Once that gold leaves the country, you can kiss it goodbye.

harharmahadev wrote:
If you are relying on Chiddu or Manmu for financial advise, you are doomed. 

no, i am relying on ajit ranade who i follow on twitter. here is something he highlighted vis a vis the current fall in rupee. RBI has more teeth than you imagine: http://www.business-standard.com/article/opinion/letters-forex-crisis-113082201167_1.html

i will read and respond to the rest of your post (if necessary) tomorrow. good night.

no, i am relying on ajit ranade who i follow on twitter. here is something he highlighted vis a vis the current fall in rupee. RBI has more teeth than you imagine: http://www.business-standard.com/article/opinion/letters-forex-crisis-113082201167_1.html

i will read and respond to the rest of your post (if necessary) tomorrow. good night.

"The market knows that the Reserve Bank of India (RBI) cannot make any effective intervention since its reserves are equal to just a few days' turnover. Of the total turnover, about one-fourth only are accounted for by real transactions. The inter-bank dealings making up the rest are fly-by-night adventures of the treasury branches of banks and others. An investigation of the treasury incomes of banks in the recent period will confirm this. There was a rule in the distant past when no net-open position was allowed at any time, even during the day besides overnight. The RBI should revive it assuring the market that it would be withdrawn when there is reasonable stability in the rates. Wily operators will argue that it would affect liquidity in the market, tarnish the image of the country, generate a panic, and so on. Let it be so. Drastic situations call for drastic action."

The above post copied from your link is really really vague. What does he mean by one fourth are real transactions and three-fourth are fly-by-night adventures of the treasury branches of banks and others??  Those three-fourth transactions may be the FII money going in and out of the trading floor of the Sensex or hedge funds or large commercial transactions.  Nobody is performing forex transactions just for shits and giggles.  I don't know what he has confirmed, but he needs to elaborate.

Is he suggesting that banks should be allowed to carry net open positions with dubious collateral?  That's not going to happen.  If it does, most stable banks will bow out. This will indeed affect liquidity in a huge way, tarnish the image of the country, generate a panic, and so on. 

This drastic action is totally senseless.  This is not even lipstick on a pig.  This idiot thinks that if you can somehow beat up all the traders into stabilizing the rate, then the problem will go away.  Good luck with that!

harharmahadev wrote:

no, i am relying on ajit ranade who i follow on twitter. here is something he highlighted vis a vis the current fall in rupee. RBI has more teeth than you imagine: http://www.business-standard.com/article/opinion/letters-forex-crisis-113082201167_1.html

i will read and respond to the rest of your post (if necessary) tomorrow. good night.

"The market knows that the Reserve Bank of India (RBI) cannot make any effective intervention since its reserves are equal to just a few days' turnover. Of the total turnover, about one-fourth only are accounted for by real transactions. The inter-bank dealings making up the rest are fly-by-night adventures of the treasury branches of banks and others. An investigation of the treasury incomes of banks in the recent period will confirm this. There was a rule in the distant past when no net-open position was allowed at any time, even during the day besides overnight. The RBI should revive it assuring the market that it would be withdrawn when there is reasonable stability in the rates. Wily operators will argue that it would affect liquidity in the market, tarnish the image of the country, generate a panic, and so on. Let it be so. Drastic situations call for drastic action."

The above post copied from your link is really really vague. What does he mean by one fourth are real transactions and three-fourth are fly-by-night adventures of the treasury branches of banks and others??  Those three-fourth transactions may be the FII money going in and out of the trading floor of the Sensex or hedge funds or large commercial transactions.  Nobody is performing forex transactions just for shits and giggles.  I don't know what he has confirmed, but he needs to elaborate.

Is he suggesting that banks should be allowed to carry net open positions with dubious collateral?  That's not going to happen.  If it does, most stable banks will bow out. This will indeed affect liquidity in a huge way, tarnish the image of the country, generate a panic, and so on. 

This drastic action is totally senseless.  This is not even lipstick on a pig.  This idiot thinks that if you can somehow beat up all the traders into stabilizing the rate, then the problem will go away.  Good luck with that!

it means that most of the 3/4th of transactions is speculative in nature. folks are encashing on the pessimism abound. stopping speculatory transactions for a short while is nothing unusual or "drastic."

Huzefa Kapasi wrote:]
it means that most of the 3/4th of transactions is speculative in nature. folks are encashing on the pessimism abound. stopping speculatory transactions for a short while is nothing unusual or "drastic."

Right....the value of Re is going up and down like gas price. That is not at all good. It has become a commodity like Onion. Such drastic up/down variation has no basis other than Speculation on Dalal Street (Or Dalal Gambling Resort). Corporations and manufactrurers can neither borrow nor plan for anything.

This is not at all good.

Huzefa Kapasi wrote:it means that most of the 3/4th of transactions is speculative in nature. folks are encashing on the pessimism abound. stopping speculatory transactions for a short while is nothing unusual or "drastic."

All stock market transactions can be considered speculative.  How do you ascertain the underlying motive of the buyer/seller in a transaction?  You can't impose random restrictions without spooking the market players even further.

The most important point is that you feel that the Rupee fall is the problem and not the symptom of the problem - which is incorrect. The rupee is not sliding because of speculators, but because there is a genuine concern about India's debt, inflation and growth; which is a direct consequence of India's piss-poor economic policies.

harharmahadev wrote:The rupee is not sliding because of speculators, but because there is a genuine concern about India's debt, inflation and growth; which is a direct consequence of India's piss-poor economic policies.

eh? you know this is only partly true. the rupee is sliding because of (the cascading effect of) fear of USA stopping QE. all currencies have slid during this time (the rupee has been the worst performer -- agreed). but it is simply not the case that a) the slide is solely the fault of CAD and india's economic policy or performance, and b) that it is always a good idea to intervene in the currency market to stem the slide (the slide in rupee has boosted textile exports already). the fall is as much because of global cues as much because of a downturn in the economy. optimistically speaking, these problems are temporary. but there is no bubble about to burst or banks going bust because of a sudden deluge of NPAs -- that is simple paranoia. indian banking system is more robust than that of the USA. we emerged unscated from the south east asian crisis.

Huzefa Kapasi wrote:

harharmahadev wrote:The rupee is not sliding because of speculators, but because there is a genuine concern about India's debt, inflation and growth; which is a direct consequence of India's piss-poor economic policies.

eh? you know this is only partly true. the rupee is sliding because of (the cascading effect of) fear of USA stopping QE. all currencies have slid during this time (the rupee has been the worst performer -- agreed). but it is simply not the case that a) the slide is solely the fault of CAD and india's economic policy or performance, and b) that it is always a good idea to intervene in the currency market to stem the slide (the slide in rupee has boosted textile exports already). the fall is as much because of global cues as much because of a downturn in the economy. optimistically speaking, these problems are temporary. but there is no bubble about to burst or banks going bust because of a sudden deluge of NPAs -- that is simple paranoia. indian banking system is more robust than that of the USA. we emerged unscated from the south east asian crisis.

I've explained my position in the first thread.  These problems are not temporary.  Here's a preview of what's coming.  Replace Gold mark with oz of gold.

- india to buy oil from iran (and iraq) in rupees: http://sp.m.timesofindia.com//articleshow/22119872.cms

- one way to tap individual gold reverves: http://www.livemint.com/Opinion/x7Y5ud53AoixIvT4jwnwwN/Getting-rid-of-golden-fetters.html

*courtesy ranade's tweets.

harharmahadev wrote:

no, i am relying on ajit ranade who i follow on twitter. here is something he highlighted vis a vis the current fall in rupee. RBI has more teeth than you imagine: http://www.business-standard.com/article/opinion/letters-forex-crisis-113082201167_1.html

i will read and respond to the rest of your post (if necessary) tomorrow. good night.

"The market knows that the Reserve Bank of India (RBI) cannot make any effective intervention since its reserves are equal to just a few days' turnover. Of the total turnover, about one-fourth only are accounted for by real transactions. The inter-bank dealings making up the rest are fly-by-night adventures of the treasury branches of banks and others. An investigation of the treasury incomes of banks in the recent period will confirm this. There was a rule in the distant past when no net-open position was allowed at any time, even during the day besides overnight. The RBI should revive it assuring the market that it would be withdrawn when there is reasonable stability in the rates. Wily operators will argue that it would affect liquidity in the market, tarnish the image of the country, generate a panic, and so on. Let it be so. Drastic situations call for drastic action."

The above post copied from your link is really really vague. What does he mean by one fourth are real transactions and three-fourth are fly-by-night adventures of the treasury branches of banks and others??  Those three-fourth transactions may be the FII money going in and out of the trading floor of the Sensex or hedge funds or large commercial transactions.  Nobody is performing forex transactions just for shits and giggles.  I don't know what he has confirmed, but he needs to elaborate.

from today's edition of the economic times:

India Moves to Make Currency Future(s) Secure: India is preparing a plan to allow greater overseas participation in the domestic currency futures market to protect the rupee from the kind of attack by speculators that saw it crash to a record low in August. Much of the speculative trade that led to the slide in the Indian currency took place in the offshore non-deliverable forwards (NDF) market, largely focused on currencies such as the rupee belonging to countries with capital controls. The rupee plunged to 68.85 to the dollar in August-end before recovering to around 61.5 following a series of measures by the central bank and government. The government wants to kill the rupee NDF market — where contracts in the currency worth billions of dollars are traded every day — by persuading those active in it to shift to the onshore currency futures market in India by easing restrictions. The move is part of the next generation of financial sector reforms on the government's agenda. Foreign investors are currently not allowed to hedge their rupee exposure in the Indian over-the-counter (OTC) or exchange-traded markets and must go through category-I banks. This has forced them to use the NDF market, where there are no restrictions and transactions costs are lower as are barriers to trade. RBI naturally has no jurisdiction over the NDF market.

One could argue that the collapse was not speculative, but the post-collapse rise is.  Indian fiscal and monetary policies are still attempting to control currency trading, rather than address the underlying root cause.  It's like putting band-aid on a gushing wound.  It won't work.

Can you tell me why RBI is putting strict regulations on spot fx? What is wrong if an investor willingly trade his funds in overseas spot fx markets? How does this affect RBI or value of INR?  I know there are some clandestine outfits that used  the overseas Forex brokers for hawala based funding which I guess it would affect safety/RBI. But how a legitimate spot fx trader can bring down the value of INR by trading in spot fx markets.