Part 1: Understanding Depreciation of Nepalese Rupee (NPR)

Most of us in the Diaspora have similar questions regarding the rapid devaluation of the Nepalese Rupee (NPR). With this in mind, the analyst side of me has sought to shed some light into this matter and answer the below questions:

Why is the NPR depreciating in the manner it currently is? Who is to blame? When can we expect to see it recover? How can I as an investor seek to protect my savings or perhaps earn a higher rate of return on my savings?

Around the beginning of September 2011, USD/NPR = 71.10. Fast forward 3 months to today, it is at it's lowest historical level: USD/NPR = 86.00+; (i.e: close to a 21% depreciation in the past 3 months!!). Most of us are well aware that a savings account in Nepal yields about 12% per annum. Sadly, for those in the Diaspora who sent their hard earned US dollars back to Nepal (in September and earlier) to take advantage of the 12+% interest provided by banks there, it is indeed a tragic fate where in essence, the 21% depreciation in USD/NPR has made the earnings on those dollars close to -9% instead. A negative 9%!

A sad state of affairs where it would've been wiser to continue holding your savings here in the US banks for a meager 1% or less that the banks here ostentatiously display on their windows as though they're providing a well-intended public service for us consumers! Actually, let me take the stashing your funds in US banks back. In reality, it would be wiser to hold your money inside a mattress at home or spend it all ala a high-roller in a Vegas roulette table since the real US interest rate is around -2% (assuming the average 3% norm in annual inflation for the past few years). Essentially you're in a weird way paying the bank to hold your money so they can make money for themselves by loaning out your savings! A bummer ain't it.

Now, to understand why the NPR is depreciating so rapidly requires a brief historical and some economics logic based on the NPR being pegged to the INR (Indian Rupee). This requires a lot more financial background on which I will delve in another post someday but here are the basics: The NPR is falling like a rock due to its unholy peg with the INR: 1 INR = 1.60 NPR. Nothing more, nothing less! India has been a huge fundamental bearish play for hedge funds, traders and investment managers who see its woes expanding.

Prime Minister Manmohan Singh's decision to backtrack on multinationals expanding in India has undermined its efforts to revive growth, curb inflation and brought about a yearlong paralysis in government. Fiscal deficits estimated by the Indian government are at 4.6% of GDP but economists predict otherwise: They say it could be above 5.6% (an astounding 23% difference!). Also, it's little surprising that we're seeing investors around the world selling off Emerging Market assets on concerns of a global recession due to the European debt crisis. And with the Eurozone crisis in mind, word is out that the EUR/USD has become the most overcrowded financial trade in history with some high profile traders on the street calling for parity in a year's time. For those who say "No damn way", look at history when in May 2002, EUR/USD = 0.88 and by May 2003, it was around 1.30 levels (65+%). That EUR/USD play was due to the US declaring war upon Iraq. Today, the situation is equally as bad: A meltdown in the entire Eurozone where Germany would perhaps be the only nation holding onto the single currency if things get any more worse. And, all this can only mean one thing: Risk Off = USD positive!

End of Part 1. More questions to be tackled in my next post. Stay tuned.

A Wall Streeter since 2002 and a doctoral candidate (currently an ABD), Nyangmi often lets the analyst side of him seek deeper meaning into the mundane nature of everyday life and it's socio-economic philosophies: Especially the topics on finance where he hopes to make it an easy subject for the Main Streeters to understand as well.



http://www.parakhi.com/blogs/2011/12/28/part-1-understanding-depreciation-of-nepalese-rupee-npr