The value of the rupee fell to its all-time low recently, prompting the Reserve Bank of India (RBI) to halt the sliding value of the currency.
Rupee Vs Dollar: When the rupee falls against the US dollar, it brings bad news for the economy, thus directly affecting the cost of living. The immediate effect of a fall in currency value is an increase in inflation. Like other markets, the money market also works on the basis of demand and supply; Thus, if the demand for the dollar becomes more, the rupee depreciates and this is the basic working pattern of the floating exchange rate.
The value of the rupee fell to its all-time low recently, prompting the Reserve Bank of India (RBI) to halt the sliding value of the currency. Paymi India founder and CEO Mahesh Shukla said the country’s currency depreciated due to geopolitical dispersion resulting from rising trade and current account deficit, heavy foreign fund outflows and strengthening of the US dollar and a range of other factors. Is. – less time.
Read also: The rupee fell to an all-time low of 77.69 against the dollar
“Ever since geopolitical tensions have arisen as a result of the war crisis, the rupee has been under pressure, with most major economies, especially in the West, imposing sanctions. As a result, prices of key commodities have increased across the world. , leading to fear. Inflation. Due to supply constraints, India has seen a significant increase in import cost,” Shukla said.
The dollar index, which gauges the performance of major currencies, has risen nearly 9 percent this year, reaching its 20-year high. In such a situation, due to the rise in the dollar, not only the rupee but also other currencies have declined.
Inflation rises, impact on spending
The biggest effect of rupee depreciation is that inflation rises. This is because the production cost becomes expensive. India imports 80 per cent of crude oil (80 per cent on imports), edible oil and other commodities to meet its demand.
Read also: Modi government’s plan to reduce GST slabs is likely to be delayed due to rising inflation
The depreciating rupee has a direct impact on the spending capacity of a person. Mahesh Shukla said that when the prices of commodities or household expenses (retail inflation) rise, it affects the customers.
impact on industry
India is heavily dependent on fertilizer imports and fertilizer subsidies are set to hit record highs. In addition, gems and jewellery, petroleum products, organic chemicals and automobile and machinery items – which are the country’s major export items with significant import content – will see an increase in margins. Mahesh Shukla said that there will be a big impact on the export sector where the intensity of imports is high.
He said that information technology and labour-intensive export sectors like textiles with low import dependency may be less affected.
foreign investors
Shukla said that the volatility in the rupee has a lot to do with the share prices. When the rupee depreciates, it affects the portfolio of foreign investors as well. Their buying and selling directly affects the domestic stock market. When the rupee depreciates, they tend to exit equity markets, leading to a major fall, which can result in a fall in the valuation of stocks of companies and other equity-related investments such as mutual funds.
Shukla explained that foreign investors keep a close watch on the movement of the rupee as their holdings get affected significantly when the currency’s value fluctuates.
When there is a sell-off in the market, the value of the rupee also depreciates due to the fear that FIIs may sell their holdings. When the market is bullish, the reverse is the case.
foreign travel, education
Foreign travel and education become expensive due to falling rupee. This is because a person has to pay more rupees for every dollar. This means that students going abroad for studies or anyone planning to travel abroad will now have to spend more.
debt became expensive
RBI has recently changed the repo rate before inflation derailed. The central bank may increase the key rate further in its upcoming policy review meeting. This will result in banks and financial institutions increasing the loan rates, which means people will have to pay higher EMIs on their loans.
what is the cause of inflation
Shortages in global supply have pushed demand higher, resulting in higher prices and inflation rates exceeding two decades. It directly affects the economy and food inflation which accounts for about half of the Consumer Price Index (CPI).
Moreover, due to high cost of imports and low export gains, Indian forex reserves saw a steady decline over the weeks, falling below the $600 billion mark after almost a year. India’s foreign exchange assets – the largest component of foreign exchange reserves – also fell significantly.
Why is a stable rupee needed?
Gaurav Kapur, Director and Co-Founder, Fincorpit Consulting said that India’s macroeconomic stability makes it an attractive destination for foreign investment and to sustain the current substantial level of foreign inflows, the country needs a stable rupee.
“In the current globalized environment, most of the costs like raw materials, shipping charges, warehousing and other related services are denominated in foreign currency or at the import par value. If the currency is weak, there will be an increase in spending which will lead to price rise,” he said. ,
“Therefore, in today’s competitive global environment a stable range-bound currency is needed for both stability and certainty to quote prices and accept orders,” Kapoor said.
Role of RBI
It is the central bank of a country that takes steps to balance the demand or supply of currency. Over the years, the RBI has taken several measures to stabilize the value of the rupee such as banning gold imports, tightening position limits on currency futures, rationalizing foreign exchange outflows by residents and encouraging capital inflows. Doing.
“The balance between GDP growth and low inflation attracts foreign investment and ultimately makes the currency stronger. Another important factor is the trade deficit. The bigger the deficit, the weaker the currency,” he said.
Read more: Loan Against Securities: Avail Loan Against Your Shares Up To Rs 5 Crore – Know How