Thread by @KirtanShahCFP

Rupee at a record low of 79/$, what’s happening?
A dummies guide in this 🧵

Do ‘re-tweet’ & help us educate more investors (1/13)

#Investing #invest #StockMarket #RupeeVsDollar #RupeeSlideDebate

(Q) Lets start with the basic, y does the rupee generally keep falling against $?

(Ans) Interest rate parity. Let me explain,

US interest rates r at 3% & India is at 7.5%. Isn’t it easy to borrow in the US at 3% & invest in India at 7.5% & make 4.5% risk free?

Nope ☺ (2/13)

Lets assume you borrow $100 at 3% from US to invest in India & are expected to pay back $103 at the year-end. In India, $1 is 75 & hence you first convert $100 * 75 to Rs. 7,500 which is invested at 7.5% giving you 8062.5 at the year end. (3/13)

If rupee is at the same value of 75 at the year-end, you get 8062.5 / 75 = $107.5 back & a clean risk free profit of 107.5 - 103 = $4.5.

But the real world does not offer risk free profits. (4/13)

What actually happens is that the rupee depreciates to 78.27 which means you get 8062.5 / 78.27 = $103 leaving no arbitrage on the table (5/13)

So when you took the loan at 3% assuming you will make 4.5% risk free, you will have no arbitrage left when INR depreciates from 75 to 78.27. So theoretically, rupee will keep depreciating till the interest rate parity exists so that there are no risk free profits to make (6/13)

(Q) The rupee does not depreciate every year, right?

Interest rate parity gives u the math value of how much the rupee should depreciate by so that there is no arbitrage opportunity but there r multiple reasons y the actual value of INR may b different from the math value (7/13)

(Q) What are the other reasons why the rupee can depreciate?

There are many but below are few impacting the rupee currently,

- High Crude prices & Inflation
- $ demand by OMC's, Importers & FIIs
- Fiscal & Current account deficit
- US Rate hike (8/13)

(a) High crude prices & inflation - Inflation reduces the purchasing power of the currency (you can buy less commodities with the same amount of rupees) & hence with increase in inflation, the currency depreciates (9/13)

(b) You might question, then why is $ strengthening with higher than India inflation?
(i) US is following a more aggressive rate hike policy & reducing $ liquidity in the system which is supporting the $. Less $'s in the system, more the demand & hence higher the value (10/13)

(ii) Oil marketing companies are buying $ to pay for crude imports, FII’s have sold $3.2B worth of securities & are buying $, Importers are buying $ & at the same time, exporters are not selling $’s assuming it to rise even further creating more demand for $ (11/13)

(c) India is expected to have a larger current account deficit, fiscal deficit & the Balance of payment is expected to be at $61B in FY 23, all 3 along with other reasons mentioned are hurting the rupee currently but we are better off, thanks to the record forex reserves (12/13)

In 2013-14 also something very similar was happening & I had recorded some series of videos around the topic (ignore the production quality :P). You can find the link in my profile if it interests you (if I share here, twitter will limit the reach of this 🧵) (13/13)

This is my 56th thread, you can follow me at
@KirtanShahCFP for some interesting content around investing

Have earlier written on,
-Sector Analysis
-Macro
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-Equity
-Gold
-Personal Finance etc.

You can find them all in the link below

https://twitter.com/KirtanShahCFP/status/1337953717274832896?s=20&t=IpXfaMap2Ssb1NTvQm9Ikw

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