Introduction
On July 19, 2022, the Rupee fell to an all-time low for the first time in history and crossed 80 per dollar. Meanwhile, amid worries about a recession and European problems, the dollar had its greatest first half in over a decade.
A break in a crucial psychological rate raises the likelihood of a free fall, raising concerns that the slide could be substantially steeper.
The fund outflow from foreign portfolio investors, growing trade deficits, and the high price of crude oil have all been detrimental to the Rupee for some time. The Rupee has decreased by about 7% when compared to the US dollar in just around six months.
If someone had made plans in Jan to visit the US now, they will have an unpleasant awakening knowing that their expenses would increase significantly due to the Rupee’s depreciation.
As the value of a country’s national currency declines over time, its residents’ cost of living increases; further, a declining currency is often considered to have negative economic implications.
Are you wondering why? Let’s delve deeper and understand why currencies depreciate and how they affect our life.
Why do currencies fluctuate?
The Indian Rupee is not tied to the dollar, unlike several other countries like Saudi Arabia, Qatar and most Caribbean nations.
The Indian currency Rupee follows a flexible floating exchange rate system, where the currency’s value is determined based on supply and demand in the foreign exchange market. Thus, the Rupee’s value concerning the dollar fluctuates.
What factors are causing Rupee to depreciate?
The devaluation of the Rupee has been caused by numerous factors. Some of them include:
- The leading causes include global events, including the conflict between Russia and Ukraine, tightening global financial conditions, and rising crude oil prices.
- Inflation, monetary tightening campaigns of the major central banks and extended COVID-19 lockdowns in China are a few factors contributing to this decline.
- Additionally, one of the main factors contributing to the devaluation of the Indian Rupee is the withdrawal of foreign portfolio investments. Due to the US interest rates growing considerably more quickly than in India, many global investors have abandoned the Indian markets. Up to 2022-2023, foreign portfolio investors have pulled almost $14 billion from Indian equities markets.
How will Rupee depreciation affect our life?
The Rupee depreciation will affect our lives in the following manner:
Imported items will become expensive
The foremost thing is that if our local currency gets devalued, there will be an increase in the price of imported items. This is because the exchange rate difference will increase imported items’ prices.
For example, there is a car company whose major components are imported. If the company earlier paid 75 per dollar, it now has to pay 80 per dollar, which means an extra 5 per dollar. In such a manner, all the imported items will become costly, since we have to pay more for them. Buying cars, electronic items, oil, etc., will become pricey.
- Increase in inflation
As the value of the currency decreases, more money will be spent on imported items, which means that domestic products will become more expensive. As a result, inflation will increase, and people’s spending habits will likely change.
Why does this happen, though? Through an example, let us better comprehend it.
India is an import-dependent country, and crude oil is the major importing commodity. To import the same, companies must buy dollars to pay for their imports. Importing products will cost more if the Rupee drops versus the dollar. Suppose they were paying 77; now they have to pay 80. It is possible that businesses will not be able to tolerate this expense rise and will instead pass it on to customers. As a result, India’s overall inflation may increase more quickly than anticipated.
Further, to combat inflation, the government might also increase the interest rate, causing loans to become more costly.
- Spending will decrease
If the Rupee gets devalued, you may have to spend more money to buy the same thing you used to buy before.
As mentioned above, all imported items will become costly, and inflation will rise, indicating that consumers’ purchasing power will reduce, and they will spend less.
For example, to buy the same pizza that we used to buy before, we need to spend more money because now its value is higher than it was before when we bought it.
- Education and travel sector will get impacted
One of the most obvious effects of the Rupee’s depreciation is that costs for international travel and studying abroad are expected to increase.
Students who desire to study abroad may experience difficulties due to the devaluation of the Rupee. This is due to the fees suddenly being more expensive in dollar terms.
The tourism industry may experience another notable effect of the depreciating Rupee. People who want to undertake their international vacation will end up spending significantly more money than they would have a few days earlier.
- Oil and gas sector will be most impacted
Since India imports, more than 85% of the oil and 50% of the gas it uses, this industry will be most negatively impacted.
The companies will have to pay more for the crude oil than they did earlier, leading to oil becoming more costly in the domestic market and consumers paying more for oil.
In conclusion, creating a diversified portfolio is the best way to handle events like the sudden fall of the Rupee. And when necessary, rebalance the portfolio to safeguard your money.
References
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