Some food for thought
"Anger and intolerance are the enemies of correct understanding."
—Mahatma Gandhi (Indian leader, 1869-1948)
Word for the day
Nepenthe (n)
Anything inducing a pleasurable sensation of forgetfulness; especially of sorrow or trouble.
First random though this morning
Police action against five popular activists with conspicuous
left leaning has once again triggered a national debate about the freedom of
expression in the country. This time even the Supreme Court of India has joined
the debate by aggressively warning the establishment against suppression of
thoughts. Liking the situation to a pressure cooker, the apex Court warned that
blocking the vent, would cause the cooker to burst.
The political establishment optically appears vertically
divided. The media and herds on social media are sparing no effort to show to
which side their allegiances stand.
In all this cacophony, one of the basic maxims inherent in
Indian ethos is totally lost. Our sages always preached that "action
speaks louder than words". Even Gandhi Ji said "action expresses
priorities".
The fact is that since 1975 at least, when Mrs. Indira Gandhi
imposed emergency in the country, politicians in power have always been
suppressing the voices that do not concur with them.
The fact is that the Congress led UPA government had also taken
stern action against these very activists. Rajiv Gandhi brought draconian
Postal Bill and suppressed Indian Express. Manmohan Singh oversaw incarceration
of many right leaning activists.
This on one hand exposes the hypocrisy of the Congress Party, in
criticizing the Modi government. On the other hand it leaves the whole debate
redundant. If we consider the actions, not words, there is not an iota of
difference between all political parties in the country. The dissent has no
place. The lesson of tolerance to divergent view preached by Buddha, Nanak,
Gandhi was lost many decades back.
Regardless, if anyone of these activists, or any other activist
for that matter, is found guilty as charged, he/she must be given the maximum
punishment possible under the law of the land.
Chart that grabbed my attention yesterday
Why this Kolavari di over INR
The Indian Rupee has been weakening continuously for past
several months. INR weakness has been a matter of debate in all spheres -
economic, political, social and markets.
For a change, the response of the participants in financial and
other markets has only been the rationale one. Market participants have
understood that over a medium term value of Indian currency vis-á-vis other
currency is primarily determined by the inflation differential.
However, in very short term, the exchange rate of currency is
usually determined, like any other commodity, by the forces of demand and
supply. If demand of USD by INR owners is more, INR would weaken, and vice
versa, in short term.
While the stocks of companies from sectors like IT and Pharma,
which have substantial export earnings, have gained post sharp INR
depreciation, the importers & USD borrowers have not seen any major sell
off.
India being a developing economy:
(a) runs a larger
budget deficit to sustain social sector and support investments in core
sectors; and
(b) runs a trade
deficit as depends on imports of many commodities (especially energy) and
technology;
(c) tolerates higher
Inflation as a necessary evil, as it motivates investment.
It is therefore natural for INR to depreciate in medium to long
term against the currencies of economies which are struggling to create nominal
inflation in their economies.
INR depreciation or strength is not a matter of debate or
concern for an investor like me. It might impact a company's balance sheet as
its assets and liabilities get repriced in local currency terms. But if the
company is fully hedged against the foreign currency fluctuations, which every
good company does, the impact is only notional, though it cause some cash flow mismatch
and working capital issues in the short term..
In terms of profit and loss account, the impact is usually seen
to last for one to two quarters only. Normally, the contracts get renegotiated
and repriced to account for the sustained exchange rate differentials.
In today's competitive world, where flow information is very
fast, unhindered and democratic, even sustaining relative exchange rate
advantages over competing currencies is difficult and unsustainable.
So I find the best way to deal with the short term exchange rate
fluctuations is to ignore it.
The politicians are same everywhere, and they strongly believe
that they can fool all the people all the time. Them making a political point
over currency weakness is meaningless and needs to be ignore totally.
The economists behavior is however somewhat surprising. The
"official economists" are maintaining that INR has actually not
weakened. It is the USD which has gained strength. Now whatever it means, it is
sufficient reason to ignore such economists.
The "opposition economists" seem to fully understand
that INR depreciation is a very normal economic phenomenon. But they are still
holding the ruling dispensation responsible for this, since the Prime Minister
had done the same, when BJP was in opposition. Why would you bother to hear
them.
In the social sphere (where people select which message to
forward and promote based on their political and religious allegiance and not
based on the correctness, appropriateness, or relevance of the message), the
weakness of INR is a matter of intense activity. Warriors from all three sides
(BJP, Opposition and NOTA) are incessantly forwarding whatever is being
provided to them by their favorites.
I must admit some of the messages are truly funny and make you
LoL for a minute. Bothering about these beyond that one minute does not make
sense, in my opinion.
To sum up:
For a businessman INR fluctuation is a short term management
issue. Most of the businessman understand and would have accounted for gradual
INR depreciation in their business plans and therefore not a business or
existential crisis.
For a central banker, any disorderly change in the currency
exchange rate could be a matter of serious concern, as it impacts current account
balance. It may also have a bearing on the reserve position thus impact the
external stability 9or otherwise) of the country. All orderly movements,
depreciation or otherwise, are routine and should not bother the central
banker.
For others, it is not more than India losing to England in a
test match in England. They feel intensely about it only till the time their
breakfast is not served, the next morning.
As an investor I would never invest in a business that is
rattled by exchange rate fluctuations; or gets too enthusiastic by it, for that
matter.
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