Wednesday, November 19, 2008

Rupee Imapct on Inflation

Haven't you encountered those several individuals that assume they are the end and be all of all knowledge. Those who speak with utmost confidence whenever they are wrong cause it makes them feel important.

I once told a joker than since the currency had depreciated it made imports cheaper thereby reducing the prices of goods. Joker wasn't aware of this argument and neither has he even heard or read about. But is ready with a bizarre set of counter responses only to serve the purpose of " Yes I must know more than you" syndrome .

Love to ask these jokers the impact of fiscal deficit and the currency. Lets take debates to a higher level. Basic fact world over is the that whenever supply increases it impacts prices of goods i.e. it comes down. So its obvious that imports and cheaper as they get lead to higher supply of domestic goods thereby reducing inflation. Even if higher supply of goods is not the result that currency impact makes these import cheaper which is important for an import sensitive economy like India's. Cheaper goods imported means cheaper prices therefore lower inflation. Basic logic.

Ex: If I have Rs 200 and Crude cost Rs 50 per barrel, I buy 4 barrels. If the rupee appreciates to Rs 40 I buy 5 barrels. With the same amount of money I buy more goods. Apply the same logic to your daily purchases. If your income remains constant and prices of goods fall, it is cheaper. It only becomes expensive when the fall in your incomes is much greater than the fall in the prices of goods. Therefore if the appreciation of crude and other imports is way beyond the appreciation of the currency the impact is negated. Joker!