{"id":384884,"date":"2024-07-25T14:07:18","date_gmt":"2024-07-25T08:37:18","guid":{"rendered":"https:\/\/zerodha.com\/z-connect\/?p=384884"},"modified":"2024-07-26T16:50:15","modified_gmt":"2024-07-26T11:20:15","slug":"its-the-economy-stupid-what-do-we-do-with-all-this-money","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-what-do-we-do-with-all-this-money","title":{"rendered":"It\u2019s the economy, stupid! What do we do with all this money?"},"content":{"rendered":"\n<p><em>We love IndiaDataHub\u2019s weekly newsletter, \u2018<\/em><a href=\"https:\/\/indiadatahub.substack.com\/\"><em>This Week in Data<\/em><\/a><em>\u2019, which neatly wraps up all major macro data stories for the week. We love it so much, in fact, that we\u2019ve taken it upon ourselves to create a simple, digestible version of their newsletter for those of you that don\u2019t like econ-speak. Think of us as a cover band, reproducing their ideas in our own style. Attribute all insights, here, to IndiaDataHub. All mistakes, of course, are our own.&nbsp;<\/em><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-people-still-seem-reluctant-to-invest-in-india\"><strong>People still seem reluctant to invest in India\u2026<\/strong><\/h2>\n\n\n\n<p>Long-time readers of this series probably know that we\u2019re very interested in the <a href=\"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-fixed-lines-soar-money-flies-people-dont\">decline in the FDI<\/a> we\u2019ve been receiving. There\u2019s some good news on that front, this week. FDI flows have been inching up over the last few months. Through April and May, the first two months of this financial year, India got 20% more FDI than it did in the same months last year. Similarly, March also saw an uptick of 20%.<\/p>\n\n\n\n<p>Are we out of the weeds, then?<br><br>Well, not quite. While FDI has grown since last year, that isn&#8217;t saying much. Last year was atrocious, when it comes to FDI. We got far less FDI last year than we did in 2022. Frankly, we\u2019re still well short of 2022 \u2014 FDI in the first five months of this year 15% below the same months from 2022.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"976\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-12.png\" alt=\"\" class=\"wp-image-384891\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-12.png 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-12-300x201.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-12-1024x686.png 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-12-768x515.png 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p>Let\u2019s dig a little further into what we mean by \u201cIndia\u201d receiving FDI, though.&nbsp;<\/p>\n\n\n\n<p>Foreign investors don\u2019t spread their money across India equally. Most of our country simply isn\u2019t attractive enough for that. There are a handful of Indian states that attract tens of billions of dollars in FDI, while the vast majority of states practically get nothing.<\/p>\n\n\n\n<p>Frankly, if you follow any amount of business news, you can probably already guess how the numbers break down. Of the $200 billion we got in foreign investment in the last four years, more than $160 billion, or 80% of the pie, has come into just four states \u2014 Maharashtra, Karnataka, Gujarat and Delhi. Most of the rest went to Tamil Nadu, Haryana and Telangana.<\/p>\n\n\n\n<p>All our other states and union territories \u2014 a giant part of the country housing almost a billion people \u2014 receive almost nothing. The graph below should tell you about the scale of the disparity between our states\u2019 investment climes. Pretty sobering, huh?<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"982\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-10.png\" alt=\"\" class=\"wp-image-384887\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-10.png 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-10-300x202.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-10-1024x691.png 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-10-768x518.png 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-but-money-keeps-pouring-in\"><strong>\u2026 But money keeps pouring in<\/strong><\/h2>\n\n\n\n<p>Other from direct investments, though, we\u2019re bringing in all sorts of money from abroad. Survey this:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>We received $1.6 billion in NRI deposits this May. In the first five months of this year, we received $8 billion as NRI deposits \u2014 the most we\u2019ve received since 2015. By the way, that\u2019s twice what we got last year.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Indian corporations have been borrowing heavily from abroad. Our \u2018external commercial borrowings\u2019 for the first five months of this year were $20 billion \u2014 10% higher than last year.&nbsp;<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>After pulling out considerable sums of money in April, FPIs are interested in India once again. So far, in July alone, we\u2019ve received more than $5 billion.<\/li>\n<\/ul>\n\n\n\n<p>At this run rate, we\u2019ll pull in much more than last year\u2019s ~$ 85 billion in capital flows by the time this year is through.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"970\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-8.png\" alt=\"\" class=\"wp-image-384885\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-8.png 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-8-300x200.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-8-1024x682.png 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-8-768x512.png 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p>If you\u2019re wondering, capital flows are when money comes into a country with string attached. Look at everything we\u2019ve talked about above. Investments, bank deposits, loans \u2014 these are all cases where money enters India, but with the understanding that it could eventually go out some day.&nbsp;<\/p>\n\n\n\n<p>Contrast this with the \u2018current account,\u2019 where money is given away with no such strings. When we buy oil from Saudi Arabia, for instance, the money we pay is gone for good. We regularly import more things than we export, so we usually run a current account deficit. (That\u2019s why the March quarter\u2019s <a href=\"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-summer-high-frequency-indicators\">current account surplus<\/a> was such a big deal.)<\/p>\n\n\n\n<p>Our high capital inflows this year will almost certainly eclipse whatever money leaves our current account this year. In all, our balance of payments (the current and capital accounts, taken together), as things are going, will cross $60 billion this year.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"966\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-9.png\" alt=\"\" class=\"wp-image-384886\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-9.png 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-9-300x199.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-9-1024x679.png 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-9-768x510.png 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-so-what-do-we-do-with-all-this-damn-money-nbsp\"><strong>So, what do we do with all this damn money?&nbsp;<\/strong><\/h2>\n\n\n\n<p>With all this money coming in, there are two things the RBI can do. <\/p>\n\n\n\n<p>One, it does nothing. It simply lets market forces go the way they will. When money flows into India, basically, foreign currency is first converted into the Rupee, and then those Rupees go to individual Indians. And vice versa. When we have a \u2018balance of payments surplus\u2019, essentially, more people want to exchange their foreign currency for Rupees, than wanted to sell Rupees for foreign currency. In other words, there is more demand for the Rupee than supply.\u00a0<\/p>\n\n\n\n<p>And so, the Rupee grows more expensive. But if the Rupee is more expensive \u2014 if it\u2019s costlier to exchange it for any other currency, think of what happens to anything we export. Anyone who buys our exports will now have to spend more to give us the <em>same <\/em>number of Rupees. In other words, our goods become more expensive for no fault of our own.&nbsp;<\/p>\n\n\n\n<p>Alternatively, the RBI can take a bunch of Rupees, and go buy some foreign currency (or, more likely, some assets denominated in a foreign currency) with it. That currency sits in its reserves, as some sort of a national savings account. At the same time, the supply of Rupees increases, and the price of the Rupee stabilises.<\/p>\n\n\n\n<p>Right now, the RBI has chosen the latter option. In the first two weeks of this month, its reserves were up by $15 billion.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"969\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-6.jpeg\" alt=\"\" class=\"wp-image-384890\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-6.jpeg 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-6-300x200.jpeg 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-6-1024x681.jpeg 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-6-768x511.jpeg 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p>Foreign exchange reserves can help you with a lot of things. As we\u2019ve written before:&nbsp;<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>\u201c<em>The country can use them to buy its own currency in international markets, to make its value go up. It can use them to pay off debts. If things go seriously wrong, it can use them to import essentials. They don\u2019t have a single, defined purpose \u2013 they help a country ride out any monetary shocks it would otherwise face.<\/em>\u201d<\/p>\n<\/blockquote>\n\n\n\n<p>Ideally, you want to have enough foreign reserves that you can import everything you need for a whole year, in case things go horribly wrong for some reason. RBI\u2019s reserves, at $ 667 billion, can cover eleven months of imports. There\u2019s a good argument that it <em>should<\/em> collect more reserves\u2026 but there\u2019s a flip side.&nbsp;<\/p>\n\n\n\n<p>Where does the RBI buy foreign currency? From banks and financial institutions. If you\u2019re exporting something to Portugal, say, and get paid in Euros, your bank will change it to Rupees for you. Then, it can hold on to those Euros, and sell them to the RBI if asked. When the RBI buys that foreign currency, it gives the bank Rupees.&nbsp;<\/p>\n\n\n\n<p>In doing do, the RBI adds more money to the system. The bank can lend that money out to someone, from where it can enter the economy. Guess what happens next? We\u2019re back to our old favourite in this series: <em>inflation<\/em>.&nbsp;<\/p>\n\n\n\n<p>That\u2019s happening at this very moment. Since the start of this month, money market liquidity is in surplus. That is, there\u2019s excess money in the system. Banks, for instance, are lending to each other at rates lower than the RBI\u2019s repo rate. They only do that when they have extra money lying around.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"975\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-5.jpeg\" alt=\"\" class=\"wp-image-384888\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-5.jpeg 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-5-300x201.jpeg 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-5-1024x686.jpeg 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-5-768x514.jpeg 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p>Sopping this liquidity up, now, is a new headache for the RBI. To do so, it\u2019ll have to give the banks something \u2014 some sort of government security \u2014 in exchange for all the money they hold, and at attractive enough rates.<\/p>\n\n\n\n<p>It can take up \u2018Open Market Operations\u2019, where it sells government securities it holds to banks. But this will cut down on the interest income it earns. Or, it can create new securities and sell them to banks, by issuing \u2018Cash Management Bills\u2019, or some other bonds under its \u2018Market Stabilisation Scheme\u2019. But that, in turn, means that the government has to pay more interest going ahead. Whatever approach the RBI takes, there will be costs. There are no easy options.<\/p>\n\n\n\n<p>You can, indeed, have too much of a good thing. That\u2019s as true of money as it is of anything else.&nbsp;<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-a-meh-month-for-trade\"><strong>A <em>meh<\/em> month for trade<\/strong><\/h2>\n\n\n\n<p>Sometimes, economic indicators just make you go \u2018<em>meh<\/em>\u2019. That\u2019s exactly how the trade data for June looks. Both our imports and exports grew slightly \u2014 in the low single digits \u2014 from June last year. Our imports grew slightly faster than our exports, though, so on the balance, our trade deficit was 10% higher than June last year.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"974\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-11.png\" alt=\"\" class=\"wp-image-384889\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-11.png 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-11-300x201.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-11-1024x685.png 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-11-768x514.png 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p>Amidst the meh-ness, there\u2019s some straight-up good news: our electronics exports keep shooting higher. This June quarter, they were 20% more than in the same quarter last year. In fact, one-fourth of all our new exports over this period were for electronics. They\u2019ve brushed past textiles and gems to become our third biggest export, after petroleum products and engineering goods.&nbsp;<\/p>\n\n\n\n<p>All our other exports, though, have barely grown in the single digits.&nbsp;<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-china-goes-slow\"><strong>China goes slow<\/strong><\/h2>\n\n\n\n<p>China thought it would grow by ~5% in the June quarter this year. At 4.7%, it\u2019s fallen well short of its target. This is the slowest growth the economic behemoth has seen in five quarters.&nbsp;<\/p>\n\n\n\n<p>Many of China\u2019s old sins are coming back to haunt it. The country <a href=\"https:\/\/zerodha.com\/z-connect\/subtext\/chinas-unreal-estate\">propped up its real estate market<\/a> for over a decade, until it turned into a bubble. That bubble popped in the last couple of years. And this quarter, the real estate industry has registered a 5% decline.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1456\" height=\"968\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-13.png\" alt=\"\" class=\"wp-image-384892\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-13.png 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-13-300x199.png 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-13-1024x681.png 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/07\/image-13-768x511.png 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/figure>\n\n\n\n<p>India, meanwhile, is on track to grow its GDP by ~7% in the quarter. That\u2019s one more quarter where the Indian economy outperforms China.&nbsp;<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity is-style-dots\"\/>\n\n\n\n<p>That\u2019s all for the week, folks. Thanks for reading!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The RBI is in a fix. Too much capital is flowing into India. And it turns out, you can have too much of a good thing &#8211; money included. <\/p>\n","protected":false},"author":242542,"featured_media":384905,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[532],"tags":[626,679,583,627,973,655,706,770,855,863,974,704],"class_list":["post-384884","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-subtext","tag-balance-of-payments","tag-capital-account","tag-china","tag-current-account","tag-external-commercial-borrowings","tag-foreign-direct-investment","tag-foreign-portfolio-investment","tag-its-the-economy-stupid","tag-merchandise-trade","tag-nri-deposits","tag-open-market-operations","tag-rbi"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.5 (Yoast SEO v26.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>It\u2019s the economy, stupid! 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