Monday, September 16, 2013

Masala Dosa and the purchasing power of rupee.

The other day I watched a Kannada movie called ‘Super’ by Upendra. Like all Upendra movies, the movie had a few feel good, a few thought worthy elements but on the whole it was stung into a very gaudy but blotchy story piece. The element that connect this piece to the movie is the exchange rate of a Rupee! In that movie a Rupee is equivalent to $100! Wow. So the film makers aspire for Rupee to become so expensive. May be it an aspirational factor, maybe there are a lot of us who think it is desirable to have an expensive Rupee. What does that really mean in the context of recent depreciation of Rupee?
To begin with let us think in terms of Masala Dosa. I say Masala Dosa, because that is one of the first things I buy as an expat on a pilgrimage home! In 2007, the price of a Masala Dosa in say a typical Darshini in Bangalore would cost about  INR 15. As given in the table below, in terms of Dollar one Masala Dosa cost $0.41. In 2009, my next subsequent trip to India, I found that the same Masala Dosa cost about INR 25 or about $0.61. Currently the same Masala Dosa costs about INR 50 or about $0.94.
Purchasing power of Rupee in terms of a Masala Dosa
$1 = INR
Cost of Masala Dosa
Cost of Masala Dosa
INR 15
₵ 41
INR 25
₵ 61
INR 50
₵ 79
Annual inflation

27% (INR terms)
18% ($ terms)
Annual Depreciation

One Masala Dosa should approach $0.81 at the depreciation rate of 12%

At the same time, Rupee has depreciated about 12 % per annum(roughly, it is never a straight line process, there were lots of ups and downs, but roughly the trend) from about INR 37 for a dollar to about INR 63 right now.  So if we adjust the price of Masala Dosa in terms of depreciation, we will see that it should approach $0.81. Which indeed it did, at current rate it is about $0.79. So  thinking  of purchasing power of rupee in terms of a Masala Dosa, currently rupee is fairly valued after all.
Sorry Upendra, INR 1 approaching $100 still appears a distant dream, definitely when inflation in India is what it is and fiscal deficit is what it is.
The depreciation of rupee is not to be interpreted as a bleak development  either. On the one hand imports become more expensive, so hopefully Indians buy a lot less of gold, a lot less of the flimsy toys made in China, and petrol (may be rely a lot more on public transportation). On the other hand our exports will become competitive in the global markets because everything in global markets are denominated in Dollars. Hopefully our exporters will find more buyers and earn more Dollars improving our balance sheet. Over a period of time, if fiscal and monetary policies are healthy, and the central government is sane, we can hopefully see a time when  inflation and also Rupee will experience some degree of stability.

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