Rupees Are Worth A Lot These Days

rupee.jpgI’ve been watching with a mixture of excitement and unease this past year as the Rupee has edged up on the Dollar; earlier this spring, the Rupee/Dollar ratio reached close to 40:1 (right now it’s dropped back to about 41:1). Now, I understand this could have all sorts of implications for the Indian economy, some good (it’s a sign of a strong economy) and some bad (it could discourage foreign investment) — but I’d better leave it to the economists in the house to sort out “what it all means.”

What I’m interested in today is an entirely different kind of Rupee inflation, specifically the repurposing of Indian Rupee coins in eastern India. BBC reports that 1 Rupee, 2 Rupee, and 5 Rupee coins are being melted down and turned into razors, at which point they are smuggled into Bangladesh:

Police in Calcutta say that the recent arrest of a grocer highlights the extent of the problem. They seized what they said was a huge coin-melting unit which he was operating in a run-down shack.

The grocer confessed to melting down tens of thousands of Indian coins into razor blades which were then smuggled into Bangladesh, police said.

Our one rupee coin is in fact worth 35 rupees, because we make five to seven blades out of them,” the grocer allegedly told the police. “Bangladeshi smugglers take delivery of the blades at regular intervals.”(link)

The problem is worst in West Bengal and Assam, which border Bangladesh. The BBC article describes some of the details of the problem — touts who buy coins operate with impunity right in front of the Reserve Bank where new coins are issued. And the coin depletion problem persists, even though the Mint has now reduced the metal content of the coins. (You can see a nice group of diagrams describing the constitution of the coins at the RBI website. 1 Rupee coins are made from stainless steel, while 2 and 5 Rupee coins are made of a copper-nickel alloy.)

Normally the metal in coins is worth less than the cost of melting them down and turning them into something else; it has to be that way, for the system to work. But apparently that’s no longer the case in eastern India. Indeed, unless the market in razor blades made from Rupee coins becomes saturated, causing the price of razors to drop, I can’t see how or why the current black market in coins should lose steam.

44 thoughts on “Rupees Are Worth A Lot These Days

  1. I remember reading somewhere that in the longer run, it costs less to mint coins than to print paper currency because coins stay in circulation longer. In other words, its OK for the cost of printing money (not to be confused with cost of money) to be greater than the value of the money if you factor in the cost of trying to keep money in circulation. Phew!

  2. I get best of both worlds. I was in desh when rupee was down and IMF (known as International Mother F***er among Jakarta’s rioting elite) was looking funny at India. Now I’m here, the USD is down. I am what the economists refer to as panvati.

  3. melting down tens of thousands of Indian coins into razor blades … The problem is worst in West Bengal…

    Ah, those evil dhoti-wearing communist Bengali Babus are still conspiring to inflict death on liberalization by a thousand cuts!

  4. I am what the economists refer to as panvati.

    Shodan, you might have a career in Vegas. But don’t fall in love.

  5. This does not make sense to me – if indeed the cost of the coins and the cost of melting is greater than the cost of the raw materials, surely there must be a cheaper way to buy the metal ! Although the profit margins right now seem pretty high, couldn’t they be even higher if these razor manufacturers got their metal from elsewhere ?

  6. but I’d better leave it to the economists in the house to sort out “what it all means.”

    Does a “wanna be economist” count? In my view, the Rupee coin melting phenomenon is happening due to the steady increase of commodity prices, since 9/12/2001.

    As commodities are considered defensive investment, as soon as the towers fell, the smart money went into commodities. China’s growth is helping in the demand side and keeping prices up.

    Since it is more expensive to buy the metals that go into the coin from outside, people are melting the coins to get the metal. I think the problem will solve itself when the commodities worldwide go into a multiyear bear market.

    As soon as new (hopefully Dem) president is in the whitehouse, the world commodities will see declines. Smart money will start getting out as soon as they find out in 08, who is likely to win. That would mean LOWER OIL prices too.

    Please feel free to poke holes in my theory. But please check the graphs of GOLD, Copper and Steel and OIL also.

  7. hmmm…surely this idea is not completely original, didn’t our beloved Dhirubhai Ambani start it elsewhere?

    ………………In the 1950s, the Yemini administration realized that their main unit of currency, the Rial, was disappearing fast. Upon launching an investigation, they realized that a lot of Rials were being routed to the Port City of Aden. It was found that a young man in his twenties was placing unlimited buy orders for Yemini Rials.

    During those days, the Yemini Rial was made of pure silver coins and was in much demand at the London Bullion Exchange. Young Dhirubhai bought the Rials, melted them into pure silver and sold it to the bullion traders in London. During the latter part of his life, while talking to reporters, it is believed that he said “The margins were small but it was money for jam. After three months, it was stopped. But I made a few lakhs. In short, I was a manipulator. A very good manipulator. But I don’t believe in not taking opportunities.

  8. I feel that irrespective of who is in the office, commodities will not go in a multi year bear market yet. Even though the prices have been increasing since 2001 as you point, gold had a substantial dip in 2002. The price of steel is increasing due to increasing construction activity in developing economies and China. The melting phenomenon is cheaper only in the short run.

    As for the appreciating rupee, as INR is not an exchange traded currency hence most volatility is controlled. Capital inflows (FDI, remittances etc) have more than doubled between March and June of this year and hence the stronger rupee.

  9. Here is an interesting article that discusses the issues with rupee appreciation. I guess I have another question for the economists in the house, hopefully someone can answer this – how come China does not have such problems and manages to keep the Yuan artificially undervalued? The article and others I have looked at in the past mention that the Chinese Yuan is pegged against the dollar, how does this work and what does this mean?

  10. gold had a substantial dip in 2002.

    Avg. price of Gold iin 2001 : $265 Price today of Gold (in 2007) : $ 645

    Check out GLD , ETF that tracks Gold although it is a new one and doesnt go all the way to ’01, you can see the chart. That is what a bull market chart supposed to look like.

    I predict that even GLD will go down, substantially when commodities come into a secular bear market.

  11. Why not just get rid of all coins, and switch exclusively to paper money? I dont see the point these days of the 1 and 2 rupee coins. The 5er, maybe, can stay.

  12. I never disputed that the prices have been on the rise since 01, all I said was there was a substantial dip in 2002. 2005-2007 have been some of the best years for commodities as well as stocks so those years are not anamolies. I am aware of GLD but gold futures right now are at five months low as there has been increased liquidation and the interest presently is on the bond yields. I strongly feel that there is a lot of steam left in metals but oil is different story.

  13. Ardy,

    I think in a nutshell the Chinese Yuan has a fixed exchange rate to a dollar. The ruling government and the central bank decides the exchange rate as against the market for exchange traded currencies like dollar. The incentive being this makes Chinese exports to the US cheaper and imports from the US more expensive. That is why there is so much noise about making the Yuan more market driven. I think this is the gist but there are other details which I can get into later.

  14. at five months low

    C’mon, Gold just hit all time historic highs (remember the ultra pyschological high of 700 !!). There was articles written when gold crossed the 500 level thats was way back in ’05. Since 2001 has been the BIGGEST gold appreciation in history.

    A barrel of oil costed $20 in 2001. It costs $68 now. That is more than 300% increase. If it was due to China than China would be covered completely with constantly running cars and people will not have any place to stand :-)

  15. In short, what I am trying to say is that commodities mainly metals and oil are in a secular bull market for the last 7 years. If I knew for sure that it was going to end in Jan. 2009 than I would not need to work for money anymore, but unfortunately I dont. I do however know for SURE that metals, oil and corn will be in secular bear market some time in future. Because no Bull market lasts forever.

  16. RC,

    Still not disputing gold, just pointed to a temp low right now in Gold Futures which are at a five month low. I speculate on it going even higher as I have much to gain:) I would love to see it cross the $1,000 level by the end of this year that is why I strongly contend against the notion of a multi year bear market;)

  17. RC:

    not all oil goes into cars. China is a huge net electricity consumer, much like the U.S. but with some seriously substandard transmission infrastructure. They eat a lot of oil in areas other than automobile gasoline consumption. They also use a fair bit to generate plastics for export and domestic consumption.

    I’d need to do research to find the actual figures…at work right now, so can’t at the moment. Anyone?

  18. And the rising cost of oil isn’t entirely due to China. But China is a key contributor, as is the U.S. Western Europe fares better, but quite a few developing-world economies are becoming major oil consumers. All this drives the price up, and so does the commodities speculation once the market turns squarely bullish (like back in 2002-2003).

  19. When I was in college back in the day, I had my aunt in India send me a bag of one rupee coins…I used to feed American parking meters with them…they were about the size and thickness of quarters, and the meters would accept them. But after doing it a few times I felt guilty and stopped. My aunt in India had no idea what I was doing by the way. I ended up stuck with a useless bag of one rupee coins.

  20. Also for the economists out there, does this story tell us anything about the economy of Bangladesh? Is the fact that it provides the market for these melted-down coin by-products (as opposed to say Pakistan or other parts of India) of any significance?

  21. China is the second largest consumer of oil right now and the most aggresive in investments in countries like Iran and Sudan. There reserves are nothing compared to the US right now but they are investing heavily to build reserves, in 25-20 years they will be importing more than 50% of their oil demand. I read somewhere that their demand is growing at 7.5% per annum, it is naive to think that China has nothing to do with increasing oil prices.

  22. See I don’t think there is a market in India as destroying currency is a crime in India. I feel that demand will stay in Bdesh as long as the revenue from a packet of blade less the cost of melting a rupee coin and converting it into blades is more than INR 1.

  23. When I was in college back in the day, I had my aunt in India send me a bag of one rupee coins…I used to feed American parking meters with them…they were about the size and thickness of quarters, and the meters would accept them.

    You should give the money back to the city with interest :)

  24. Don’t forget the $3 billion worth of stock that China has bought in Blackstone.

  25. Brown, thanks for your reply in #15. Thats what I thought it meant but then I see this problem. For something like the Rupee, it’s market driven and thus if the demand for the rupee increases vis a vis dollar, it rises in value and vice versa.

    However, say the demand for the dollar decreases and that of the Yuan rises, in such a case the dollar will fall and despite an increase in demand the Yuan will also fall. Now that seems a little counter intuitive and also a recipe for a runaway reaction. Maybe the Chinese Govt. could float more Yuan to the market but then that would result in a rise in inflation (though I guess that might reduce the demand and bring the Yuan on it’s way to track the dollar). So how does the Chinese Govt. ensure that this tracking of the dollar does not affect things?

  26. RC,

    A barrel of oil costed $20 in 2001. It costs $68 now. That is more than 300% increase. If it was due to China than China would be covered completely with constantly running cars and people will not have any place to stand :-)

    The price of oil fluctuates a lot – it is perhaps the most complex commodity, the way it fluctuates. To some degree, all commodities tend to be fickle. Even to some degree OPEC cannot even control the fluctuations in oil and gas, as they were once in 70s, but since 80s, not at all. China is just an emerging buyer. World politics, wars, inventories in US, futures market (oil is traded in futures market), hedge funds – all factor in. The way it gets priced depends many variables. If I went into it on Sepia Mutiny comment section, it will be a mini-thesis. A good place to start is Daniel Yergin’s The Prize.

  27. I think you are correct about the Yuan part, if the Chinese govt seek to keep the exchange rate fixed they may go out and buy more yuan or sell more dollars from their huge reserves. I am not sure but I think that the rupee is not 100% floating, the RBI still monitors it closely and manipulates it by issuing Market Stablization Bonds. I am not sure of the exact working.

  28. It makes sense to me that razors are worth more than money over there in Bengal. Have you seen us? We’re a pretty hairy bunch…!

  29. Come on, sepia mutiny, YOU HAVE to do a blog article about the indian couple who allowed their kid to do a C-section. That story is taking one bizarre turn after another and you ought to put in your 2 cents. I’m tired of hearing the news, I want to hear it being discussed (preferrably by indians) and I’ve tried to find discussion blogs on the web about this issue but nothing so far. I come here each day and I see you’re still refusing to talk about it, it’s like the elephant in the middle of the room that noone is talking about.

  30. Brown – I think the way the RBI controls the rupee is indeed by issuing stabilization bonds. If say the dollar starts weakening vs the rupee due to an increase in the demand for the rupee, RBI starts buying dollars (the money for which it raises through the bonds) and thus stabilizes it. The problem is that to get investors to buy more of these GOI bonds, it has to increase the rates on these bonds and it can only do that so long. I think we are at a point where the Govt cannot issue more bonds as it pleases and India’s forex reserves are over $200B and thus we are seeing some appreciation of the rupee (which I suspect is still controlled and gradually appreciating).

  31. Come on, sepia mutiny, YOU HAVE to do a blog article about the indian couple who allowed their kid to do a C-section.

    Might happen, stay tuned… Meanwhile, send us an email (or tip) with links to other places where it is being discussed.

  32. I see you’re still refusing to talk about it, it’s like the elephant in the middle of the room that noone is talking about.

    Or…it…could be that they’re taking a break because it’s summer and they warned us about just that. If no one is talking about something, that’s a great reason to start your own blog.

  33. Something sounds wrong in this story:

    Why don’t the blades sell for the same amount within India? The 1:35 ratio mentioned surprised me. According to wikipedia, the US one-cent coin costs about 0.95c in metal and another 0.06c to make. So, we are approaching a similar inversion in the US, but 35 times??

    Also, why isn’t there a similar trade in 2Rs coins. I did some rough math. The coin is 6g of cupro-nickel. Copper is going for roughly 30paise/gram (3.3$/Lb). Nickel is far more expensive at about Rs 1.5/g. Don’t know how much of each, but even if we assume its all copper, its approaching face value.

    Is there something special about the “ferratic stainless steel”? The most expensive quote for steel I found was about $750/ton, which would make the 1Re coin cost about 0.15Rs in metal. Am I missing something here?

  34. I stand corrected, stainless steel actually costs ten times as much, and would make the 1Re coin cost about Rs 1.4.

  35. I think the 1:35 is a coin worth Rs 5 when melted and converted into blades, the pack of blades sells for 35 Rs. Atleast that is what my understanding was.