Brazil learned a currency lesson first, now India. Is Australia next? Japan?
The lesson I am talking about is the widely held misconception that a sinking currency will make manufacturers more competitive and thus help the economy.
A friend from Australia emailed such thoughts to me a few days ago regarding the sinking Australian dollar.
But recall what Brazil’s finance minister said on March 3, 2012 in a currency war declaration on the US: “When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil“
In a flash forward to August 25, 2013 we see Brazil Plans $60 Billion Currency Intervention Scheme; Indonesia Abandons Intervention, Adopts Other Measures.
Let’s now turn our attention to the Indian Rupee.
Decline in Rupee in Two Years
Conventional Wisdom vs. Reality
One US$ gets you 50% more rupees than it did two years ago (a 33% decline in the Rupee). My Gosh! With that kind of selloff, conventional wisdom suggests India ought to be in heaven.
Here is a bit of reality: Currency collapse confounds India Inc
Indian companies such as Whirlpool of India Ltd say they can’t plan more than a couple of months out as a fast-falling rupee currency drives up the cost of imports, forcing them to raise prices even as consumer spending crumbles.
Companies that import finished goods or raw materials are the worst hit as they scramble to hold onto margins while balancing the need to raise prices without deterring buyers.
“We are now planning for a month or three months at best unlike six months or a year earlier,” said Shantanu Dasgupta, vice president for corporate affairs and strategy at Whirlpool of India, the local arm of Whirlpool Corp (WHR), the world’s largest home appliance maker.
“A week back in our office we were working at (a rupee exchange rate of) 62 and now it’s at 64 and looks like soon it will fall more and hit 67. How can a business operate when the currency is on a free-fall?” H.S. Bhatia, head of the enterprise business at television maker Videocon Industries, said in an August 21 interview.
Indian shoppers are not only cutting back on big-ticket purchases such as refrigerators, TVs or expensive branded apparel but even staples including soaps, ketchup and cosmetics.
A survey by the Associated Chambers of Commerce and Industry in June found monthly bills for the middle class jumped by 15 to 20 percent in a month across major cities as the falling rupee drove up prices of petroleum products and edible oil.
A paper in August by the same group found that even deep-pocketed consumers were cutting back, with five-star hotels and fine dining restaurants registering a decline of 20 percent in sales in the past three months after prices of imported food ingredients and spirits rose.
How Can Businesses Operate in A currency Freefall?
There’s theory and then there’s practice. Brazil and India have both noticed the distinction.
Crude Daily Chart
As I watch the price of crude soar with tensions rising in the Mideast I wonder when Japan (which imports nearly all of its energy needs) will realize how misguided its inflationist policies are.
History suggests Japan will notice long after it’s far too late for Japan to do anything about it.
In the meantime, please consider Japan Finance Minister Seeks Record Debt Servicing on Interest on National Debt; What’s Next?
Mike “Mish” Shedlock