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Academic studies have shown that the long-term trends in exchange rates are 0%, i.e. any short term or mid term fluctuation is eventually reversed. Since my investment horizon in stocks is Buffettesque (never sell), obviously exchange rate trends are meaningless for me.



Since we are discussing the INR, I wanted to jump in because I think I have used the INR more than most of you since I am an Indian.

The exchange rate between $ and INR in the 80s was no more than 1$ = Rs 10, and then dollar got stronger and stronger to the point of 30,40 and finally peaked around 48-50 per US$. Today it has gone back to 1$ = Rs 38 to 40. So, if the long term trend in exhcnage rates is 0%, then will the exchange rate go back all the way to 1$ = Rs. 10? I do not think the market currently assumes any such possibility. I just wanted to jump in and point out that the above assertion looks absurd. The exchange rate changes cannot be zero% in the long run. Instead they will depend on variety of factors, like trade surplus/deficit, and other economic factors that generally affect exchange rates. Also, I remember in the 90s and 80s, the govt of India deliberately devalued the currency to boost Exports. Believe it or not, at that time, the govt of India ran very low on Foreign Exchange reserves (US$), which today thanks to software exports and related industries runs at record highs. At that time no one really predicted or dreamt that India would actually be on the world map like it is today. When I left india in 1999, the landscape was much different. The sensex had returned flat (almost zero) returns from 1995 - 1999, a far cry from recent 300% growth in the index.

India's stock market has seen similar surges back in the early 90s, but this time they say its different. And I somewhat agree, this time the bubble is supported by strong fundamentals. Which perhaps may not make it an actual bubble.

About HDFC, I'd like to pose a questions, why should one pay a P/E as high as 31 for a bank? Doesn't anyone else feel nervous? What kind of P/E were supported for US Banks by the market back in the day when they were smaller and on a very fast growth trajectory perhaps like HDFC?
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