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June 23, 2009

Without having to do much how I lost 20 % of my savings in 2008.

  • Without having to do much how I lost 20 % of my savings in 2008.

    Samir Konnur presents:

    I earn in Mexican Pesos, but need to save in Indian Rupees. As there is no institution that will give me rupees in exchange for the pesos, I need to first convert my pesos in to green backs – the US Dollar. And subsequently in India convert dollar into rupees.

    Now consider the facts –
    US economy has been in recession for over a year while India & Mexico are still enjoying positive GDP growth
    Unemployment has skyrocketed in US while India & Mexico has relatively been stable
    Major US banks & Institutions in US have collapsed, none so in India & Mexico

    Based on the above one would have assumed that both Mexican Peso and Indian Rupee would have become stronger against the USD but …. The value of both currencies have fallen since September

    In September - 10 Pesos made 1 USD today roughly 14 Pesos make a 1 USD ( 40 % reduction in value of the peso)
    In September - 42 Rupees made 1 USD today roughly 49 Rupees make a 1 USD (20% reduction in value of the rupee)

    So for someone earning in Pesos, saving in rupee thru the dollar

    If I saved 1000 pesos in September, I would have got 100 dollars – and in turn saved Rs.4200 in India (At exchange rates prevailing at that time)
    Today if I saved 1000 pesos I would get 71 dollars – and in turn be able to save – Rs. 3500 in India (At current exchange rates)

    Net loss 17 % L

    So I went about researching this puzzling phenomenon – and found how Interest rates & Inflation affect the exchange rates. Now re-look at the facts

    Interest rates in US are around 1 %. In India over 8 % while in Mexico over 4 %
    Inflation in US less than 2 %. In India over 9 % in Mexico over 5%

    So exchange rates tend to balance the impact of Interest rates, inflation amongst various countries. Eureka !!

    Why would you invest in a financial instrument – bond, security, etc to get some return in form of interest .. Right? Read the article below

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