Nowadays, everybody is hearing and reading about the weakening rupee against the US dollar. Today we will talk about how the weakening rupee, affects the common man, and the economy. There is one surprising fact that whenever there is a general election in India, prior to that; the rupee mostly depreciates against the dollar. In the Reserve Bank of India policy for April, they mentioned that every 5% fall in the rupee leads to an increase in retail inflation by 20 basis points.
The following are some of the effects of the rupee depreciating against the dollar, on the economy and common man:
Importers of the goods and services would be highly affected, as they will have to pay more money for importing the same goods or services. On the other side, exporters would be delighted as they would get dollars which in turn would be converted to more rupees. But exporters benefit would be nullified in future as they will demand less dollar prices in the international market and try to get more sales and customers in.
India’s current account deficit would also increase. as a weakening rupee increases the import bill; and India imports more than what it exports. So, this would pose a threat to the overall growth of the Indian economy.
The most affected would be companies, who have exposure to short-term borrowing in dollars. They borrow because they get it at a lesser rate of interest from international markets. Now that the Indian currency is depreciating, they must give more rupees for the principal repayment of their debt in the future.
The oil marketing companies would be affected the most as India imports more than 80% of its oil requirements. Nowadays the price of crude oil is increasing and the rupee is weakening. But these companies can pass this cost to the common man as the government has deregulated the prices of petrol and diesel. Due to this, the prices of petrol and diesel are at all time high and increasing every day. This also increases transport costs and leads to inflation in the economy.
A weakening rupee also affects the foreign investment in the country as investors don’t get the confidence to invest. Those who have already invested, also start getting negative returns, as when they liquidate these investments they first get INR which gets converted to USD.
A weakening rupee also affects the students who are studying abroad or who are planning to go abroad, as now they must give more rupees to buy USD. It will also affect tourism i.e. People who are planning to go abroad for holidays in the same way.
The rupee is going to remain weak unless the government and Reserve Bank of India take some action. In the coming months, the rupee is going to remain weak due to volatility in crude oil prices, increase in trade deficit and uncertainty over results of state election and general elections.
In the next article, we will let you know how government bodies can take some measures so that rupee doesn’t depreciate further.