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Commentary, Opinion

What's the deal with inflation and the rising rupee?

To control inflation, the RBI seems to be letting the rupee rise. It closed at its 8 year high on Thursday, at Rs. 42.9 to the dollar. Gains of nearly 5% this quarter means quite a bit. Let’s see – a $1 million revenue will now yield 20 lakh rupees less than last quarter, and 20 lakhs would typically be 10 peoples quarterly salaries.

Now why is the rupee appreciating? That’s RBI covering inflation – the idea being that earlier, the RBI used to sell rupees and buy dollars. This brought more rupees into circulation, which fuelled inflation. Now if it doesn’t sell the rupee, inflation isn’t further fuelled. (doesn’t mean it’ll reduce, it just won’t increase) This simply means demand for the rupee is greater than supply, so the rupee will increase in value.

So how long will this continue? Your guess is as good as mine. Inflation is not ridiculously high – it’s just 6.5% for heaven’s sake, and we’ve had 7-8% in 2004-05. From 5% in June 2004, we went to 7.94% in August 2004 and then back down to 5% in Jan 2005. (If you’re looking for weekly inflation reports, they are here)

Now think back – around the August 2004 time frame, the Sensex was around 4000. In hindsight, would you have bought stocks? Like a TV ad says, “yeh bhi koi poochne ki baat hai?” – with the sensex at 12500 today the question is moot. But at that time, there was a gloom and doom feeling on all media just like today. Inflation is a just a tool being bandied around; don’t be a sucker this time.

Unfortunately, the government is using rising inflation as a stick – to control industries they should not control. Like the ridiculous policy on cement, which can’t be explained better than by Kaushik. First a higher tax on cement, then a deal to freeze prices for a year and finally removing duty on imported cement. And when questioned about why, Kamal Nath, our minister for doing-whatever-it-takes-to-screw-industry, splutters and hangs up the phone – see the video:

We won’t let you earn profits, but we won’t cover your losses either, it seems. They banned futures trading in wheat in Feb 2007, not realising this doesn’t do diddly squat for the prices. This is just a method to control inflation, they say, but in reality, this is not unrealistic inflation, and nothing can control inflation when it’s not out of control in the first place.

6.5% is not backbreaking considering that even conservative estimates expect a growth of 9% this year. Even the World Bank thinks so.

  • kaho pyare says:

    >Deepak, I agree with you that the way government is trying (projecting their methods) to control the inflation is not the right way to do so.
    I should better say that the way they are projecting their methods are wrong (maybe because their intentions are wrong). as i somehow support their decision to remove import duty for cement. we are open economy and our industries should be able to compete with its global peers. if they can make/sell cheap cement, why shouldn’t we.

    Also do you really think that inflation is just 6.5%. i had lived/worked in hyderabad, and too maintain similar lifestyle there i would have to shallout nearly 2 twice as much as i was shalling 2 years ago. so it is a 100% increase in 2 years. and beleive me, it is same situation in other Tier 2 cities also. so by my yardstick (or in general middle class yardstick), it is whopping 40% inflation.

    on funnier note, i would be much happier if we somehow can import real estate as well theirby curbing the phenomenal rice in prices/rentals.

  • Anonymous says:

    >Deepak,You are rite that the steps taken by the government to control inflation doesn’t seem to be appropriate.May be due to elections in the crucial state of UP,govt is projecting their methods as stern steps so that middle class people can feel that this government cares for the aam aadmi.On the other hand what do you have to say about the increase in cement prices which were hovering around Rs 130-135 per bag around the same time last year and now are alomost 220-230 per bag.This mind-boggling increase in price cannot be just due to the ever increasing demand.I am sure there is more than it appears behind this.

    Regards,
    Anshul

  • Deepak Shenoy says:

    >Kaho pyare: Removing import duty for cement without removing excise duty for local manufacturers is a downright stupid thing to do. We can make cement as cheap as foreign producers if excise duty and customs duty are at equal levels.

    Inflation: I live in Bangalore and honestly, nothing has gone up severely in my lifestyle or cost. You may not notice it but your lifestyle may have changed – the hotels you visit may have become “upmarket” and increased prices, for instance. That doesn’t change inflation – it’s those hotelsthat are more expensive.

    For Hyd, inflation is perhaps increasing as the price of biryani increases at that famous joint (forgot the name). Find out if that has increased – that is your common man’s inflation.

    Anshul, if people are willing to pay 220-230 per bag of cement that will be the price. It’s not about aam aadmi or otherwise – it is about you and I being willing to pay the price. if we don’t want to, we can say no, right? Cements are cyclicals – they will go up and down. They have had a number of bad years, and to blame them now for making profits is ridiculous. When the hotel industry was inthe doldrums in 2002-03, no body felt bad for them and that they were offering 5 star facilities at some Rs. 3000 per night. Now when the demand is higher we all cry that they ask for 15,000 per night. Not fair at all.

  • Anonymous says:

    >Deepak, I dont think anybody can afford to say no even if he finds cement prices too high.Imagine, somebody is constructing a house to live for past 1 year.Last year he would have estimated the project cost at Rs 130-140 per bag and gradually he finds prices have climbed to 220-230 levels.His all budget would go for a toss!!.He cant leave the partially constructed house as it is and wait for the cycle to turn in his favour.Nor he can chose to buy cement from any other part of India as huge transportation cost are involved.
    Same thing has happened with civil contractors across India.Poor guys estimated the project cost by factoring in the cement prices at 130-140 levels and now after 1 year they find their margin getting hit.
    It’s completely playing in the hands of cement manufacturers.I just dont understand the phenomenal rise in 1 year.
    Regards,
    Anshul

  • Deepak Shenoy says:

    >Anshul: how many people have half built houses? I doubt that is more than 10% of the total construction industry. In any case, you CAN afford to stop a partially constructed house – I know a number of people who have done this.

    I have seen the real estate industry for over 20 years – the risk of prices rising (steel, cement, regulation, labour) is extremely high and usually well factored into the prices. Otherwise why should big projects be sold at ridiculously high prices?

    The cement manufacturers are just making their profits when they can. Nothing is wrong with that. If there is really a price arbitrage, some cement will be cheaper due to competition (no there is no cartel involved, this is an extremely competitive business).

    Cement will come down, it’s a cyclical. Just because prices have gone high does not mean the government has a right to control it. They can increase supply – and the way to do that is to LOWER duties, not raise them. They’ve done that for customs duty, now isn’t it fair to do the same for excise? (Instead of raising it – how stupid is that)

    Cement companies are highly leveraged – and the government has increased the cost of borrowing. They have input costs which the government is not helping reduce. Why should they reduce prices?

  • Jp says:

    >Deepak,

    I remember a proverb,
    “Be in the shoes of a Fox to justify his hunt”

    “Everyone can afford to STOP construction” This point can be viewed and argued in different angle. To make sense we should talk with data like how much loses cement companies are making and how much end consumers are charged for it

    Everyone can afford to STOP construction.Yes.But, do you think prob will be solved for the individuals.

    For example, Construction companies quote even the initial price of their projects with high margin to accommodate such inflation. On top of this, they have all privilege to hike price whenever they want. So they dont care much on such inflation as long as they can adjust price to make profit. They are the premium customers of cement companies. Who is paying finally? End Consumers. Unless they stop, individuals cant do anything.

    Govt has to do its duty to save the consumers.So I personally feel nothing wrong in Govt stand as long as their motive is good.

  • Deepak Shenoy says:

    >JP: I wouldn’t agree. I think price control is going back to the licensing era. We want a free market for pricing period.

    If the government wants it can increase supply, like it has done by reducing import duties. Second, right now all cement companies are expanding capacity so tomorrow the prices will be lower because of more supply. Will the government help the cement companies by increasing the price of cemetn then?

    The government should not be in business. Unless there is a cartel or a monopoly the government has no right to dictate how much profits anyone makes.

    This is a bad precedent to set. Finally the FM has reversed his decision and gone with a countervailing duty instad, a far better approach.

  • Jp says:

    >Deepak,

    dont misunderstand me. Then what is the purpose of having a Government and FM implementing regulation.

    Am not against cement companies making profit. Cement Companies, You, Me and everyone can run business in this democratic country to make profit. Govt cant poke into your business as long as you are genuine enough. Same time Govt should be genuine enough on taking such decision.

    You can even ask, if an individual has concern they can approach consumer court. But if such trend is common and majority of people are getting affected, Govt has to step in before consumer court get involved.

    If you dont want Govt to intrude in your business. Why are we complaining Govt if the Petrol Price goes up?. Because it was pretty much owned by govt (until recent past)

  • Deepak Shenoy says:

    >JP, thanks for that. Regulation does not mean regulation of profit. It means regulation of industry. If we want regulation of profit that is going back to the stone ages.

    Instead, create price regulation through fair competition and promoting supply rather than such silly rules. As I said, they have overturned it already so the point is moot.

    Second, I don’t complain about the govt. when petrol prices go up. I complain about the oil companies. I hate price regulation for this very purpose; today, if prices were not regulated, the price of petrol would be about Rs. 3 lower – current prices were used when oil prices were above $70 a barrel. Plus the dollar has slipped 5% already. Have you seen the benefit of the lower costs in your petrol bill? No. You know why? Because the petrol prices are regulated.

    Becaues the govt. chose to keep control on petrol prices instead of openly allowing hte market to determine price. These companies now say that they are “recovering” losses made during high oil prices; yet, HPCL, BPCL and IOC are doing pretty well according to their financial reports.

    You pay higher prices on Petrol today than you should, purely because the prices are regulated by the govt. Do you want the same thing to happen to cement? I would rather have a free pricing regime with regulation against cartels and monopolies.