By Disha Dembla
It is hard to miss the buzz and speculations about the fall of the Indian rupee and its consequences, but what does the fall actually mean? This article tries to decode this economic issue, understand the reasons for it, and the impact that the current situation of the Indian rupee in relation with the US dollar can have on us.
The Basics:
Foreign exchange market – Whenever two countries trade or do any kind of monetary transaction, it becomes necessary to convert currency of one country to another, so that the currency is compatible to be used. This is done at foreign exchange markets. The US dollar is usually considered as the most commonly accepted currency. The demand of currency in international market determines its value with respect to domestic currency.
Example: Earlier you got 1 USD in 60 INR, but now you get it in over 70 INR. This shows that dollar value is increasing and rupee value is decreasing. What is causing the rapid rise in dollar value? One of the major reasons is the Turkey crisis of 2018, wherein the investors started taking out their money from Turkey, thereby, increasing the dollar value. Similarly, there are many investors, who have invested in countries like India and Argentina, and have started taking their investment out, and the end result is visible – increase in dollar value and decrease in rupee value.
The impact of rising dollar can be seen across sectors:
• Import – Whenever an Indian company imports goods, it pays in dollar. With high dollar price, Indian companies are encountering a high import bill and thus paying far more than they would have earlier. India imports 70-80% of crude oil, palm oil, fertilizers – increase in dollar value has caused a direct increase in the prices of these commodities.
• Export – The impact here is exactly the opposite of the impact on import. By exporting at a high dollar price, India is benefitting by receiving more money. Pharmaceutical companies, being the largest exporters, are the biggest gainers.
• Current account deficit – The deficit refers to the difference between export and import, if import is more, current account deficit is negative. India has maximum imports; therefore, a deficit is not beneficial for India but beneficial for China as it is a major exporter.
• Inflation –It is the increase in prices of goods and services. India imports crude oil, with high dollar price, as a result of which, petrol and diesel prices are increasing; consequently, transportation cost is increasing, thereby impacting vegetable costs. Palm oil which is used in soaps, detergents, etc. is also imported. It is used as a standard to determine the price of other types of edible oil. With increase in dollar, palm oil price is increasing.
• Student loans – Increasing dollar is a nightmare for students studying in the US. With a high dollar value, their foreign education loan value increases, ultimately making their education more expensive.
• Travel – The depreciating rupee value is not encouraging for the tourism industry since expensive currency conversions tend to deter foreign travel
• Automobiles – A lot of equipment that is used in this sector is imported. Because of depreciation, the cost of manufacturing increases, increasing the overall automobile cost.
• Foreign direct investment – Investors invest to set up a new company (Greenfield investment) or in existing companies. With no stability in Indian rupee, investors are inclined to remove their money and invest somewhere else. This is a discouraging move for India.
The falling rupee has a negative effect on the economy of India and is a matter of concern. While the government is taking steps to revive the rupee value, will the steps bear fruit in the long run, is a question only time, (or perhaps another article), could answer (or speculate). Meanwhile, what are your views on the possibility of the revival of the Indian rupee?
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of IndusGuru Network Partners
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