The value of the rupee recently fell to an all-time low, prompting the Reserve Bank of India (RBI) to stem the decline in the currency’s value.

Rupee against 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 impact of the fall in the value of the currency is this rise in inflation. Like other markets, the money market also operates on the basis of supply and demand; thus, if the demand for the dollar becomes high, the rupee depreciates and this is the basic working methodology of the floating exchange rate.

The value of the rupee recently fell to an all-time low, prompting the Reserve Bank of India (RBI) to stem the decline in the currency’s value. Mahesh Shukla, Founder and CEO of PayMe India, said widening trade and current account deficits, strong outflows of foreign funds and a strengthening US dollar were the result of geopolitical spills and a range of other factors that led to the fall of the country’s currency. – low weather.

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“Since geopolitical tensions erupted in the wake of the war crisis, the rupiah has been under pressure, with most major economies, especially in the West, imposing sanctions. As a result, the price of essential goods has risen in the world, raising fears of a supply limitation, India has seen a significant increase in import costs,” Shukla said.

The dollar index, which influences the performance of major currencies, hit a 20-year high this year, up almost 9%. So, not only the Rupee but other currencies also fell due to the Dollar bull cycle.

Inflation rises, impact on spending

The major impact of the fall of the rupee is that inflation increases. This is because the production cost becomes more expensive. India imports 80% of crude oil to meet its demand (80% of imports), edible oil and other products.

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Rupee depreciation has a direct impact on an individual’s spending capacity. Mahesh Shukla said that when commodity prices or household spending increases (retail inflation), it impacts customers.

Impact on industry

India is heavily dependent on fertilizer imports and fertilizer subsidies are expected to hit an all-time high. In addition, gems and jewelry, petroleum products, organic chemicals, and automobiles and machinery – which are the country’s main export products with a large import content – ​​would see a margin increase. Mahesh Shukla said the main impact would be on the export sector where import intensity is high.

Information technology and labor-intensive export sectors like textiles, which rely little on imports, could be less affected, he said.

Foreign investors

Shukla said the movement of the rupee has a very strong correlation with stock prices. When the rupee falls, it also has an impact on the portfolio of foreign investors. Their purchases and sales directly influence the national stock market. When the rupiah depreciates, they begin to pull back from stock markets, triggering a sharp drop that could lead to lower valuations of company stocks and other equity-related investments like mutual funds.

Foreign investors closely follow the movement of the rupee as their holdings are significantly affected when the value of the currency fluctuates, Shukla explained.

When the markets witness a sell-off, the value of the rupee also depreciates due to fears that FIIs may offload their holdings. The situation is reversed when the markets recover.

Travel abroad, study

As the rupee falls, travel and education abroad become expensive. This is because a person will have to give more rupees for exchange for every dollar. This means that students going abroad to study or anyone planning a tour abroad will now have to spend more.

Loans are getting expensive

The RBI recently changed the repo rate to act quickly before inflation derails the economy. The central bank is expected to raise the key rate further at its next policy review meeting. This will result in banks and financial institutions raising lending rates, which means people will have to pay more EMI on their loans.

What causes inflation

The shortage of global supply has pushed up demand, causing prices to soar and pushing inflation rates to more than two decades. This has a direct impact on the economy and food inflation, which accounts for almost half of the consumer price index (CPI).

In addition, India’s foreign exchange reserve has seen a steady decline over the weeks, reaching below $600 billion after almost a year, owing to the higher cost of imports and declining export earnings. . India’s foreign currency holdings – the main component of foreign exchange reserves – also fell significantly.

Why a stable rupee is required

Gaurav Kapoor, Director and Co-Founder of Fincorpit Consulting, said India’s macroeconomic stability makes it an attractive destination for foreign investment and to maintain the current substantial level of foreign inflows, the country needs a stable rupee.

“In today’s globalized environment, majority of costs such as raw materials, shipping, warehousing and other related services are denominated in foreign currency or import parity price. If the currency is weak, spending will increase, causing prices to rise,” he said. .

“Therefore, a stable, range-bound currency is necessary for both stability and certainty in quoting prices and accepting orders in today’s competitive global environment,” Kapoor added.

RBI’s role

It is the central bank of a country that takes action to balance the demand or supply of the currency. Over the past few years, RBI has taken several measures to stabilize the value of the rupee, such as tightening restrictions on importing gold, tightening position limits on currency futures, streamlining outflows exchange by residents and the encouragement of capital inflows.

“A balance between GDP growth and low inflation attracts foreign investment and ultimately strengthens the currency. Another important factor is the trade deficit. The larger the deficit, the more the currency weakens against the USD,” he said.

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