Is the Rupee undervalued?

Votaries of a weak rupee point to the example of China which – to the rest of the world’s annoyance – has deliberately kept the yuan undervalued, forcing US legislators to consider officially declaring Beijing a ‘currency manipulator’. The comparison with India though is not valid. China is the manufacturing workshop of the world. Exports comprise around 32% of its GDP. Last year, it displaced Germany as the world’s largest exporter (with annual exports of $2 trillion). In contrast, exports account for only 18% of India’s GDP. A weak rupee does not help the other 82% of India’s economy. Quite the contrary: a current account deficit arising from an import bill of $460 billion (over 25% of Indian GDP) erodes the currency, pushes up inflation and lowers competitiveness.

A stronger rupee will not only trim India’s  trade and current account deficits and temper inflation, it will attract more FDI and FII. Today, foreign investors factor in a historical 4% annual depreciation of the rupee when computing their return on investment. Were the rupee to strengthen, dollar returns would rise concomitantly. Average central bank lending rates in the west and Japan are 0.25-3%. In India, the RBI’s repo rate, at which it lends funds to banks, has averaged 7.00-8.50% in the recent past. The gap mirrors precisely the historical annual depreciation of the rupee against the dollar. A stronger rupee would reduce that gap and bring India in line with advanced economies.

Wouldn’t Indian services – especially IT software – suffer if the rupee hardens? Service exports sell increasingly on quality, not price. Many (especially refined petroproducts and polished diamonds) have high import content. Besides, services include sectors such as foreign tourism that benefit from a stronger rupee. The biggest long-term beneficiaries of a stronger rupee would be India’s manufacturing productivity.

Cheaper imports would allow companies to ramp up foreign technology and build infrastructural and manufacturing assets. These, in turn, would lead to a spike in competitiveness, boosting exports based on quality, not marked-down prices. This would create a virtuous cycle of high productivity and quality allied with low inflation and deficits.

So what should be the value of a more muscular rupee? The Economist’s latest Big Mac Index shows that the rupee is undervalued vis-A -vis the US dollar by 61% while the yuan is undervalued by 41%. While The Economist’s Big Mac Index has, over the years, been a surprisingly accurate indicator of exchange rate trends, discounting The Economist’s index for India’s low-cost economy, the rupee is probably currently undervalued against the dollar by about 25%. A fair value of the rupee would, therefore, be just under 40 to a dollar. Our former finance minister, now prime minister, who 20 years ago said 25 to a dollar was fair value for the rupee in pre-reform India, might well agree.

RBI panel for hassle-free remittance, investment

The Reserve Bank of India (RBI)-appointed panel suggested significant liberalisation of forex regulation to allow hassle-free remittances and overseas investments. “To enable hassle-free remittances by resident individuals, banks may be advised by the RBI not to insist on the submission of form 15 CA/15 CB for any remittances under the Liberalised Remittance Scheme (LRS),” the report of the panel headed by former RBI Deputy Governor KJ Udeshi said.

The report of the Committee to Review the Facilities for Individuals under Foreign Exchange Management Act (FEMA), 1999 said over a period of time, the FEMA rules now contain contradictory provisions and there is also a need to make definitions uniform and consistent across FEMA.

The committee is of the considered view that the procedural ‘knots’ in the system need to be untied to enable the present forex liberalisation to be effective and in the absence of untying of these knots, any further forex liberalisation will not be meaningful.

The report also noted that instead of an erstwhile single regulator (the RBI), we now have a multitude of regulators, each interpreting FEMA in his own way.
General permission, it said, may be granted to resident individuals to acquire shares of a foreign company in part or full consideration of professional services rendered to the foreign company or in lieu of Director’s remuneration.
Besides, it suggested, general permission may be granted to resident individuals to acquire qualification shares of an overseas company for holding the post of a director without the existing limitations.

It is to be noted that the committee was set up, following the announcement in Annual Monetary Policy for 2011-12 in May. “Recognising the need for facilitating genuine foreign exchange transactions by individuals – Residents/Non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) – under the current regulatory framework of FEMA, Reserve Bank has constituted a Committee under the Chairmanship of KJ Udeshi,” RBI Governor D Subbarao had said in the Annual Monetary Policy for 2011-12.

The objective of the review was to identify areas for streamlining and simplifying the procedure so as to remove the operational impediments and assess the level of efficiency in the functioning of authorised persons, including the infrastructure created by them.

Among other recommendations, Indian resident employees or directors may be permitted to accept shares offered through an ESOP Scheme globally.
It also suggested that the Portfolio Investment Scheme needs to be reviewed in its entirety and there is no need for continuation of the existing scheme.

Source:-Business Standard

Importance of Remittances

Remittances contribute to the financial and social inclusion of needy people worldwide and to the economic growth of a country. They also play an important role during financial crises. The recent World Bank report on remittances is a testimony to the fact that remittances flows have remained more resilient as compared to private debt and equity flows and foreign direct investment.

Remittances are stable and may even tend to be counter-cyclical in times of economic hardship. Remittances are now more than double the size of net official flows and are second only to foreign direct investment as a source of external finance for developing countries. In 36 out of 153 developing countries, remittances are larger than all capital flows, public and private.

Remittances could also help in reducing poverty, as it could be the poor who migrate and send money to their families. Some may argue that it is actually the rich who can migrate and send back remittances. Remittances could also be used to promote literacy. Studies show that the school dropout rate is lower and enrollment rate is higher in households that receive remittances.

There is tremendous potential for using remittances to encourage development in countries. Remittances could increase when the home country’s economy is going through a patchy phase. During such times, an individual might prefer to remit more to aid his family’s consumption back home. The money sent home could also be used to promote economic growth, increased investment and community development.

Countries That Lead In Outward Remittances

In this section, we aim to bring a series of country led insights on their immigration and remittances. Based on the World Bank Report, these nations have been contributing immensely to the GDPs of numerous developing nations and providing valuable foreign exchange.

We start this series with United States, ranked No. 1 in the remittance outflow at US$ 48.3 billions (as per 2009).

United States

It is classified as one of the high-income countries. Following are certain interesting facts regarding this country: –

Population (2009) 307 million
Population growth (avg. annual %, 2000–09) 1.0
Labor force (2008) 156.3 million
GDP growth (avg. annual %, 2005–09) 1.2


  • Immigrants: 42,813.3 thousands
  • Immigrants as percentage of population: 13.5%
  • Females as percentage of immigrants: 49.9%
  • Refugees as percentage of immigrants: 1.3%
  • Countries from where citizens migrate to the United States: Mexico, China, the Philippines, India, Puerto Rico, Vietnam, El Salvador, the Republic of Korea, Cuba, Canada.

Outward remittances from the United States have increased on a YOY basis, apart from 2009, which was marginally affected due to the economic slowdown.

Do you think this trend of outward remittance would continue to grow from the US?


Having analyzed United States of America, now lets take a look at Australia.


Population (2009)


21.9 million


Population growth (avg. annual %, 2000–09)




Labor force (2008)


10.9 million


GDP growth (avg. annual %, 2005–09)




  • Immigrants: 5,522.4 thousands
  • Immigrants as percentage of population: 25.7%
  • Females as percentage of immigrants: 43.8%
  • Refugees as percentage of immigrants: 0.8%
  • Countries from where citizens migrate to Australia: the United Kingdom, New Zealand, China, Italy, India, Vietnam, the Philippines, Greece, South Africa, Germany

Although the labor force is less as compared to the United States of America, we can see that population is growing at a good pace. The average annual GDP is growing at a faster rate as compared to the United States of America.

Also, from the above table, one may assume that Australia attracts immigrants and thus, may be the outflow of remittances has been increasing on a YOY basis.

Do you think that this trend of outward remittance would continue to grow from  Australia?


United Kingdom


Population (2009)


61.8 million


Population growth (avg. annual %, 2000–09)




Labor force (2008)


31.4 million


GDP growth (avg. annual %, 2005–09)




  • Stock of immigrants: 6,955.7 thousands
  • Stock of immigrants as percentage of population: 11.2%
  • Females as percentage of immigrants: 49.7%
  • Refugees as percentage of immigrants: 4.3%
  • Countries from where citizens migrate to United Kingdom: India, Poland, Pakistan, Ireland, Germany, South Africa, Bangladesh, the United States, Jamaica, Kenya

Based on the data presented above, it can be noted that the population growth in the UK is less as compared to that of the United States of America and Australia. Also outward remittances have been declining post 2007 for 2 consecutive years. One may attribute the steady drop in outward remittances to the economic slowdown in 2009. The labor force is much more as compared to Australia, but the GDP growth is rather slow. But, a noteworthy point is the stock of immigrants which stands at 6955.7 thousands.

Will this factor lead to a steady increase in remittances?



Population (2009)


81.9 million


Population growth (avg. annual %, 2000–09)




Labor force (2008)


41.4 million


GDP growth (avg. annual %, 2005–09)




  • Immigrants: 10,758.1 thousands
  • Immigrants as percentage of population: 13.1%
  • Females as percentage of immigrants: 46.7%
  • Refugees as percentage of immigrants: 5.5%
  • Countries from where citizens migrate to Germany: Turkey, Italy, Poland, Greece, Croatia, the Russian Federation, Austria, Bosnia and Herzegovina, the Netherlands, Ukraine

Germany is ranked as no. 5 in the list of top remittance sending countries in 2009. It managed to accumulate 15.9 US$ billions as outward remittances. One very interesting fact to be noted is that Germany has more immigrants as compared to United Kingdom and Australia. There has been no growth in Germany’s population since 2000-09. Hence, one could assume the birth and death rates to be at par in this country.

Other interesting fact to be observed would be the ever-growing outward remittances. The remittances outflows were unaffected even during the economic slowdown in 2009.

Do you think that this trend of outward remittance would continue to grow from Germany?


How significant are Remittances?

Table #1

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Table # 2

The above table # 1 clearly indicates that remittances are again on the rise after a decline during the year 2008-2009. The World Bank report titled ‘Migration and Remittances Factbook 2011‘ states that worldwide inflows are expected to reach $440 billion by 2010. Remittances to developing nationsare likely to reach a record figure of $325 billion from the 2009 figure of $307 billion. India ($55.0 bn) has also been ranked as the no.1 remittance recipient in 2010 followed by China ($51.0 bn), Mexico and other countries.

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Also, remittances have been resilient as compared with other resource flows (as per the table above) especially during the global financial crisis. Despite a decline in remittance inflows to developing countries in 2008-2009, these flows have remained more resilient compared with private debt and equity flows and foreign direct investment. The reasons could be as follows: –

1. Remittances are sent by the cumulated flows of migrants over the     years, not only by the new migrants of the past year or two. This makes remittances persistent over time. If new migration stops, then over a period of a decade or so, remittances may stop growing. But they will continue to increase as long as migration flows continue.

2. Remittances are a small part of migrants’ incomes and migrants continue to send remittances even when affected by income shocks.

3. Because of a rise in anti-immigration sentiments and tighter border controls in the United States and Europe, the duration of migration appears to have increased. Those migrants staying back are likely to continue to send remittances.

It is generally assumed that in a large economy like India’s, the impact of remittances is negligible. But, compared with some important factors of the economy, their relative importance is significant. How big is $ 55.0 billion as remittance revenue? It is almost one and half times of India’s defense budget and also bigger than India’s total IT exports. Remittances result in more capital inflows into the country, which in turn could lead to more investments in health, education and small business.

With better tracking of migration and remittance trends, policy makers can make informed decisions to leverage this massive capital inflow for the benefit and development of the country.


Remittance- a boon

Remittances are the only means of survival for millions of poor households worldwide where money sent to beneficiary families enable them to afford not only the basic necessities of life which are otherwise lacking or inaccessible, but also a degree of economic empowerment. Remittances in addition to supporting domestic consumption, have also promoted investments in real assets including building schools and clinics, rather than formal sector financial instruments.
At the macro level, the use of remittances has helped to counter the effects of economic downturns such as political conflicts, financial crises and natural disasters, and contributed, to some extent, to the stability of recipient economies. Remittances also constitute a steady stream of foreign exchange that helps to stimulate economic growth in migrants’ countries of origin.

The effects of remittances are not restricted to the migrant households and stretch out to the entire community. The contribution of remittances to development is deduced primarily from migrant household surveys that supply information on the uses of remittances.

Until the onset of the global recession, remittances had proven to be a steady and dependable source of income for households in developing economies.

Remittances represent a significant and vital financial source; hence the issue of their effects is of utmost importance. It constitutes a very high proportion of foreign exchange. These inflows have enabled to maintain a growing level of foreign exchange reserves.

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