We will soon be trading in senior citizens, as the Rupee will cross 60.
This was a joke that was going on in the financial community, just a few weeks back and now that analysts are predicting it to hit 70, it is interesting to note that our currency is ageing pretty fast.
But what is all this fuss about? Does one really need to care if the currency slides? These and a few other questions are what this blog intends to answer. We are in our financial week and couldn’t stay away from this topic, which doesn’t fail to make the daily news.
Due to the free fall of the Rupee and the seriousness of the situation, we shall only be discussing the impact of the depreciation on the general. As for the trading rules and value determination, it can easily be found on the internet, if not do let us know and we shall address it soon.
Why should we care about the fall of the Rupee?
Life was uncomplicated in the olden days. Our economy was closed, we mostly bought good produced in the country and the value of the Rupee didn’t have much impact on us. However, with a globalised world, the falling of the currency will have a serious impact on our day-to-day living.
The falling rupee potentially can hit our pockets directly and make management of our day-to-day expenses challenging. In order to understand this, let us look at how rupee impacts our savings and has the potential to derail financial planning:
The Rupee and Loan Rates
The Reserve Bank of India has been quite active and quick in responding to this situation, harsh steps have been taken targeting individuals, corporates and banks. While this is not the suitable platform to go into details of the technical instruments being used by the RBI, it is important to note that the measures being used impact the amount of money the banks are able to play with, which results in less cash at hand for the banks.
While this may seems like a bad thing, as the amount of money supply can impact growth, it helps maintaining the value of the currency, as it results in reduced flexibility for trading and extending loans, which can be a deterrent to speculation and possibly stabilise the currency. However, since that hasn’t happened, the RBI will have to play its most dreaded weapon, raising the repo rate. This is a rate related to the amount of money banks have to deposit with the RBI to operate and give loans.
Raising repo rate will tantamount to pressing panic button. If repo rate goes up, banks will not hesitate to pass it on the customers unlike what they do when rates fall. The situation seems to have just reversed from what it used to be three months back when everybody was expecting interest rates to fall.
All in all, if the rupee continues to fall, there is a high chance that loan rates will go up impacting both your financial planning and day-to-day life.
Expensive Imports
A depreciating Rupee would mean that every dollar which we have to pay for our imports, costs more. Though it means that the imported commodity / product would become costly in India and any product with elastic demand would result in lowering the demand for such imported products. However, in case of India most of our imports are of products which are inelastic, e.g. Oil, luxury products, etc. and hence despite of rising import prices, our imports don’t come down.
Oil Prices Sky Rocket
Oil prices in India are a subject of two factors – international crude oil prices and the currency factor. Even though oil prices may decline 10% in International markets, currency depreciation may offset this decline resulting in high oil prices in India.
As a result, high oil prices creeps into the prices of almost every commodity and product in the economy. Oil plays a fundamental role in India’s economy as it supports the fundamental structure of all Industries by fuelling up the energy requirements. A higher oil price would result in higher cost of production and higher logistics / transportation costs.
The fire of inflation
This paragraph gels in perfectly with the above points which stresses upon imports becoming expensive with a depreciating Rupee. And a direct consequence of it, the inflation in the economy shoots up. Higher inflation results in commodities becoming more expensive. Countries which import their essential commodities suffer more than countries who are major exporters. Unfortunately, as mentioned in above paragraphs, India is a major importer of Oil which tends to hit the cost structure of the economy and fuelling the inflation scenario in the economy.
The Problem at Hand
The most worrying aspect of fall of rupee is that it has been purely caused by fundamental factors and hence curbing of speculative activities alone cannot arrest depreciation of rupee. High inflation and high rate of inflation have caused rupee to reach this stage.
The demand for dollar has been strong because of higher imports as well. The middle class Indians need to be ready to face the music if positive policy measures are not initiated by the government in India.
We would love to hear your thoughts on the essay and we would be happy to comeback with any clarifications required.
