Indian Rupee Needs to be Strong for India Story to Play Out Like China

Globally, interest rates have been at historic low since quite some time. Central Bankers (CB’s) have now deployed NIRP (Negative Interest rate Policy) as in case of Japan and EU (European Union). This flood of liquidity unleashed by CB’s are a big boost to Western entrepreneurs, who need risk capital as well as debt on easy terms.

In India’s case, perpetual and artificial supply-side constraints created by socialism of Nehru, Indira and Rajiv, since independence, perpetuated legacy inflation, thus stripping Rupee of its purchasing power. Simultaneously, huge Government borrowing to finance budgetary deficits created a debt overhang, resulting in Government borrowing humungous money from the Banks to pay for interest outgo/ repayments and leaving little for Private companies, most of which have always been actually more efficient utilizers of this money. Thus interest rates in India have always been in the range of 7-15% p.a. In case of MSME’s (Micro, Small and Medium Enterprises), which borrow unsecured loans, many times from the Black Money market, interest rates range from 15-40% p.a. This high financing cost leaves limited margin of error and a high price of failure, especially for Indian startups.

Then there is the curious case of an ever weakening INR against the USD. By 1965, INR was 4.75 to a USD, it is currently near 68. A host of “experts” have called for a weaker INR justifying it to be boosting exports. They fail to look at China, which kept its currency, the Renminbi, strong all along, and built its famous export driven story. A strong Renminbi allowed it greater imports of technology, equipment and raw materials. The INR denouncers also fail to realize that actually, Indian exports are NOT a function of a weak INR! This is because if INR depreciates, the benefit is expected to be passed to Foreign entities importing from India – and hence Indian exporters rarely gain with a weak INR.

US, Japan, Europe have been printing record amount of currencies in circulation. Post the East Asian crisis, when a group of investors led by George Soros shorted ASEAN currencies and led to a crisis, most countries started keeping foreign currency reserves to stave off chances of a currency crisis and country default. Because of legacy of Oil getting transacted in Dollars and with the world keeping their reserves in Dollar, Euro and Yen, even such large printing of currencies by US, Europe and Japan hasn’t led to their currencies losing purchasing power.

US Funding ecosystem chases growth over profitability in the short term. Amazon grew under perpetual losses for 15 straight years, each year reinvesting its cash and incurring balance sheet losses, but kept on capturing market share – Investors rewarded the company with increase in its market capitalization, making further access to capital easier for it! US Investors chase equity classes also owing to low returns on fixed income products abroad (with interest rates being near Zero). Equity, therefore, is a favored asset class. 

Flood of capital chasing the next potential Unicorn gave the West a patient investor ecosystem since return expectations were always so low. Ergo, the very structure of Funds, wherein one could take as much as 90% leverage by piling on extremely low interest debt from carry-trade currencies like Yen, Euro and USD, boosted availability of easy money.

But sanity soon returns and crazy ways of justifying Startup valuations like traffic/ GMV (Gross Merchandise Value) etc get discarded for an EBITDA multiple based one – so operating efficiency and profit potential soon come into play, as Amazon also found out. It’s another matter that some of Amazon’s investments like Amazon Web Services (AWS) became hugely profitable in themselves and hence lent greater justification to investor’s long-drawn patience.