Economy Aug 22, 2013
Since everyone, and his aunt, is offering his or her two cents worth of advice and comment on the flailing rupee, here's mine: and it's worth one-and-a-half cents, not two cents.
Literally. At 65 to the US dollar, that's what the Indian rupee is worth right now. And this should engender new kinds of thinking about the rupee that is more optimistic.
First, the numbers.
At 1.53 cents to the rupee, clearly the dollar is the wrong unit to compare the currency with. We should now benckmark against the US cent. Seen this way, the rupee is stronger than the US currency by at least 50 percent. So cheer up.
Against the British pound today, the rupee is almost at par with our former colonial masters' currency. And remember, today the rupee is quoting at a very auspicious 101 to the pound. This is a sign that the gods are with us. So what if one rupee fetches slightly less than one pence today. At 0.99 pence to the rupee, the figure is even more auspicious. Remember: 101 and .99 are both lucky numbers.
Now, the yen. At 1.51 yen to the rupee, we are clearly the stronger currency when it comes to the Japanese currency. Sorry to do this to you Shinzo Abe, but Manmohanomics is leaving Abenomics in the dust.
Next, gold. But, hey, that's not currency, you will object. Sorry, chaps, gold is money, never mind that central banks don't like competition from the yellow metal. Guess what the price of gold was in 1950, the year India became a republic? Rs 99 per 10 gm (currently Rs 31,310 per 10 gm). That's a 316-fold-depreciation against the metal. To make the comparison more logical, we should thus state gold prices in multiples of 0.1 gm. We then get a nice affordable price of Rs 313 per unit of gold (0.1 percent). Even the NREGA wage earner can now afford gold. At Rs 313 for a spec of gold dust, we can hold our heads high. This is the aam aadmi route to inclusive currency policy.
We can, of course, go on and on showing how strong the rupee really is when viewed against the right unit of foreign currency or gold. The fundamental error the markets make is to benchmark us not against the right currency, but the wrong unit of any currency or gold.
But that brings us to the rupee when measured against it own former value. Since we started with the exchange rate of one rupee equals one pound sterling in 1947, and the pound is now worth Rs 101, the rupee's own value can thus be deduced to be around one-hundredth of what it was in 1947. We will probably get worse results - that is a rupee drop in value to less than a hundredth of its purchasing power in 1947 - when we deflate the rupee by adjusting it for inflation.
Put simply, today's Re 1 is worth less than 1 paisa of 1947. Perhaps this is why parliament legislated a law in 2011 to allow the RBI to mint new Rs 1,000 coins - coins, not notes.
Now, for the remedies.
To make the rupee more valuable, and to economise on printing notes or coins, it is best to let the current rupee die an unsung death. At 65 to the dollar, it is anyway close to retirement age. We should issue a New Rupee which is 100 times as valuable as the existing one.
The best way to upgrade the rupee is to redenominate it by decreeing that old Rs 100 = New Rupee 1. While currency in the bank will automatically be denominated in the new rupee, the currency with the public will have to be brought to banks to exchange for new Re 1 notes.
A side-benefit: those Pakis sending us fake currency notes will be left with a lot of unbankable notes. And so will our black money holders.
New Rupee is the way to go.
More From R Jagannathan.