The International Trilemma – Is it an answer to India’s FX Depreciation?

Exchange Money Conversion to Foreign Currency

The International Trilemma was first found by Mundell and Flemming. The trilemma is for a country to maintain integration, regulation and sovereignty.

  1. Integration: Implies a free flow of goods, services and capital into and out of the country. (ie. integration with the world markets.)
  2. Regulation: A freedom to decide the forex rate, that is keeping a constant forex rate or pegging it with another currency.
  3. Sovereignty: Implies the independence of the Central Bank of a country to decide on the money supply in the economy.

The trilemma is primarily that a country can choose any 2 of the above and regulate the same. Managing all three is not possible and creates disequilibrium in the economy. For example if a country chooses Integration and Regulation, then it cannot maintain money supply. Say the country reduces its interest rates to increase the money supply in the economy in an attempt to fuel growth. As the interest rates have fallen, capital flight will occur as capital will go to countries offering relatively higher interest rates. Demand for forex will increase, which would put depreciatory pressure on the domestic currency rate. If the exchange rate is fixed, then a disequilibrium situation occurs and the government will require selling massive amounts of forex to support the exchange rates. The government may try to control capital flights by way of imposing foreign exchange norms, thus reducing the level of integration with the world economy.

As we have seen above, a country may only control any 2 of the 3 parameters. In the present situation of India, the government is trying to control all the above 3 parameters viz. Maintain exchange rates, ease capital flows and control money supply. As Indian economy needs to be fuelled and inflation has tempered, the central bank is reducing interest rates, which in turn increases capital flight and therefore depreciating the currency. Stepping-in of the central bank for selling forex will not rectify the disequilibrium situation but only deplete the reserves. Exchange controls or increasing interest rates could be a possible solution as per the Mundell-Flemming model.

In the words of Paul Krugman “The point is that you can’t have it all: A country must pick two out of three. It can fix its exchange rate without emasculating its central bank, but only by maintaining controls on capital flows (like China today); it can leave capital movement free but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain – or Canada); or it can choose to leave capital free and stabilize the currency, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today)”[i]

“20 Million” Missing Indian Men

Yes, you have read it correctly; over 20 Million men are missing from the working population of India based on the data tabulated for the past 15 years. The results are shocking, the death rates of Indian men increase once they are born. The number of deaths of Indian men over a 5 year time period from 1995 – 2000 in 5 year age groups are given below [i]

(in ‘000)

Age Group












































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Can a person eat a scrumptious meal with Rs. 12? – A Data Backed Analysis

Potatoes are one of the most used staple foods.

Recently many politicians have remarked that a scrumptious meal can be eaten at Rs. 12, Rs. 5 and even at Rs. 1. Let us try to scientifically analyze these statements with backup data.

As per Indian Council of Medial Research[i], the average daily calorie need for a working man (ie. Labourer) is 3490 Kcal. For a scrumptious meal atleast the daily calorie requirement needs to be met. Let us assume that the labourer eats only the staple food, say wheat. Read more of this post

Sexual Harassment at Workplace Act

Women on Top: How Real Life Has Changed Women'...

The Protection of Women Against Sexual Harassment at Work Place Bill (Act) had been passed in the Rajya Sabha recently and has become a law. This Act deals with protecting women from harassment in workplace and providing a safe environment.  Let us now analyse the provisions of the Act in detail –

  1. This Act is not gender neutral as only women can file a complaint. No man can file a sexual harassment complaint. Are men not harassed sexually? Do refer to the links here, here, here and here. Read more of this post

Process and Method of Change – Part 1

WIRED magazine's anti Clipper "Cyber Righ...

There are many issues, policies and rules around us that we want to change for betterment of the society. In other words bring about a positive change for humanity. Societies in general discourage and penalizes ideologies that request change. Change is difficult to fathom as it challenges status quo. The other party at that point of time comes out with justifications on why the status quo is required giving examples of history, religion, political reasoning or legal issues. These justifications are generally motivated to prove such movements are unfair, unethical or illegal.

‘Rules for Radicals’, a book by Saul Alinsky provide implementable suggestions on the issues faced by people wanting to change status quo. It suggest howto organize the resources and then use it in a way to carry out change, in a peaceful manner. Below is part 1 of the 3 part series having a short summary of Saul’s book with my interpretations and twists. Read more of this post

IrBM Arguments in the Media

Divorce Cakes a_007

Recently there has been a spate of discussions in the media on the upcoming Irretrievable Breakdown of Marriage Law (IrBM). Some important highlights of the proposed bill are –

  1. Divorce can now be filed as a ‘No-fault Divorce’ stating that marriage has broken down irretrievably.
  2. Husbands do not have the right to oppose the divorce petition filed by their wives, whereas the wives can oppose the divorce petition filed by the husbands. Hence, the irretrievable break down of marriage can only be claimed by a wife and not the husband as husband’s petition can be challenged by the wife.
  3. All the property of the husband that he currently owns and his ancestral property (inherited or inheritable) will be divided between the husband and the wife.

Some arguments that have been promulgated for supporting this bill during media debates are –

1) Poverty is a gender issue and primarily in India women are poor: This is a baseless argument as the data shows just the opposite. Two most important features of poverty are malnutrition and substandard healthcare due to which the life expectancy reduces and deaths due to diseases increase respectively. Read more of this post

Roads in Potholes


Representative Picture

Everyone travelling in Mumbai would have felt the pain of traffic jams and broken roads. There are hardly any roads in the city only back-breaking potholes. Every year crores of rupees is spent on the road infrastructure of Mumbai but still we don’t see any improvement.

For financial year 2012 -13, the total projected revenue for BMC was Rs. 26,581.02 crores (~US$ 5.32 bn) and a projected expenditure of 26,474.10 crores (~US$ 5.29 bn) of which allocation for road infrastructure was Rs. 1,466 crores (~US$ 293.2 mn) which has increased from Rs. 713 crores (~US$ 142.6 mn) from the past year.[i] Over the past 7 years BMC’s revenues have increased exponentially from Rs. 6,715.5 crores in FY 2006-07 to Rs. 26,581.02 crores in FY 2012-13, which is roughly a growth of 4x times (ie. 22% y-o-y growth rate).

Let us try to analyze the above numbers in perspective of road length of Mumbai –

  1. Total length of roads in Mumbai [ii]: 1,889 kms
  2. Average maintenance expenditure for 1 km of a 4 lane highway per year[iii]: Rs. 10 lakhs (~US$ 20,000)
  3. Total estimated maintenance expenditure per year for Mumbai based on above data (1*2): Rs. 188.9 crores (~US$ 37.78 mn)
  4. Assuming inflation and increased maintenance of Mumbai roads due to extra wear and tear and traffic, we use a multiple of 3 times. Hence, the total estimated maintenance expenditure comes to about Rs. 566.7 Crores (~US$ 113.34 mn)

The total budget allocation of Rs. 1,466 crores for road infrastructure for FY 13 was about 2.6x times the estimated maintenance requirements; and still we get a road infrastructure which creates this:

Mumbai Traffic Jam

Why do we get such a poor infrastructure even after spending more than 2.6 times the estimated requirement for upkeep of Mumbai roads?

[iii]  (Annexure 1, page 23 of Financing of the National Highway Development Programme)

Conversion rate used 1US$=Rs. 50

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