Most people don’t understand it but a weakening rupee raises the cost of living, especially impacting the cost of essentials and leaving you with less in your pocket at the end of each month. It also impacts a wide variety of sectors, from automobiles to electronics, agriculture and aviation. The health of the rupee is, in fact, an indicator of the state of the overall economy. So, a falling rupee is bad news for you and me. Please listen to the latest episode of All Indians Matter.
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[00:00:10] Today, the rupee suffered its worst single day drop in close to two months.
[00:00:14] Indian currency, the rupee, has been making headlines every day for the last few weeks.
[00:00:19] Trump's policies could impact the rupee as well. The Indian currency could depreciate more against the dollar. By how much? The SBI believes by 8-10%.
[00:00:26] If Donald Trump's defeat is direct to the rupee, we are seeing the weakness.
[00:00:56] It sends ripples across various sectors, affecting imports, exports as well as investor sentiment.
[00:01:03] Most importantly, it has a massive impact on the cost of living in India. Listen on to understand how.
[00:01:18] First of all, currency weakness is an indicator of a cooling economy. The signs have all been there and we have been discussing them.
[00:01:25] Rural distress, high unemployment, soaring inflation, declining exports and slowing foreign direct investment.
[00:01:31] In this financial year till July, exports were 6% lower than in the same period the previous year.
[00:01:37] FY24 saw foreign direct investment decline by 3.5% and foreign portfolio investors or FBIs withdrawing from India thanks to an overpriced equity market.
[00:01:47] In August, FBIs pulled out more than $2.5 billion from Indian equities.
[00:01:52] What's more, there is a persistent danger of a surge in oil prices due to geopolitical tensions in the Middle East which will hurt the rupee further.
[00:01:59] In FY24, India's oil import bill was managed by heavily discounted Russian crude but in FY25 these discounts have been reducing.
[00:02:07] Indeed, geopolitical tensions and related concerns have impacted the rupee.
[00:02:11] The uncertainty around global events means there is a flight from the currencies of emerging markets and even some developed ones to the US dollar.
[00:02:18] As a result, these currencies depreciate while the dollar appreciates.
[00:02:23] Among these factors, other than the ones I have already mentioned is the victory of Donald Trump in the US presidential election.
[00:02:29] So what does a weak rupee mean for you?
[00:02:31] At a broad level, it means a higher cost of living.
[00:02:34] India relies heavily on imports especially of crude oil which accounts for a large part of her fuel consumption.
[00:02:40] So India will end up paying more for the same amount of oil.
[00:02:43] In other words, it requires more rupees to buy the same amount of dollars it needs for the crude.
[00:02:48] Higher fuel costs are passed on to consumers and businesses.
[00:02:52] Costlier fuel raises the prices of essentials like vegetables because their transportation costs are now higher.
[00:02:58] This is what is known as import-induced inflation.
[00:03:01] Rising inflation means your home budget gets tighter because you have to pay more to buy the same products from groceries to transport,
[00:03:08] leaving you with less to spend on discretionary items or investor savings.
[00:03:12] Many households are unable to make ends meet anymore.
[00:03:15] Even electronics such as phones and laptops will become costlier since most of their components are imported.
[00:03:21] Costlier crude also means air travel getting more expensive as well as plastics and fertilizers.
[00:03:26] The latter will impact an already embattled agriculture sector.
[00:03:29] Those businesses that have foreign currency debt face higher repayment costs and those reliant on imports will have their profit margins squeezed.
[00:03:37] Sectors that rely on metals and electronics will feel the pinch because their production relies heavily on imported commodities.
[00:03:44] Again, these commodities will cost more.
[00:03:46] If you plan to study abroad or have a child whose education abroad you are financing, the rupees fall means your budget will have to expand to meet the expenses.
[00:03:54] Sectors like automobiles are also highly dependent on imports of raw material.
[00:03:59] A weak rupee increases the price of the furnished product, which you pay for of course.
[00:04:03] It might mean that you will need to put off buying that car or two-wheeler and automobile companies will face shrinking sales.
[00:04:09] Even if you buy the car, the higher cost of fuel will increase the cost of using it.
[00:04:14] There are of course parts of the economy that benefit from a falling rupee.
[00:04:17] Sectors like IT, metal and pharmaceuticals which mainly export their offerings would benefit because they would get more rupees for the dollars they charge.
[00:04:25] Tourism too gets a boost as it gets cheaper for foreign travelers to visit India.
[00:04:29] It also gets us more foreign exchange and generates jobs.
[00:04:32] However, if you are the one planning to travel abroad, it's bad news because you will need more rupees for what you spend in foreign currency.
[00:04:38] Through the wider macroeconomic lens, a depreciating rupee should improve the trade balance.
[00:04:44] The trade balance is the difference between the cost of imports and exports.
[00:04:47] Now India's imports have always been higher than its exports.
[00:04:50] So when the rupee depreciates and we get more for the dollars we earn for our exports, the trade balance improves.
[00:04:57] While this is a theoretical explanation, we find that in the real world, a currency depreciation doesn't do much for the trade balance.
[00:05:04] Also let's be clear, currency depreciation by itself does not make exports more complex.
[00:05:08] There are other critical factors such as demand, trade policies and the cost of production.
[00:05:14] So whose job is it to keep the currency stable?
[00:05:17] While it's not solely the Reserve Bank of India's responsibility, it plays a major role in managing the rupee's volatility.
[00:05:23] It intervenes by either buying or selling foreign currency from its reserves.
[00:05:27] Such interventions stabilize the rupee and a stable rupee makes foreign investors more confident of investing in India.
[00:05:33] Of course, the RBI has its own limitations.
[00:05:35] India's forex reserves are healthy, but that doesn't mean it can keep using them to stabilize the rupee.
[00:05:40] As I mentioned, a weak currency leads to inflation, so the RBI would be cautious also in lowering interest rates.
[00:05:47] This means credit does not become cheaper for businesses or you if you're looking to buy a home or a car on loan.
[00:05:53] This in turn can cool growth and of course impact employment generation.
[00:05:58] So as you've seen a stable currency is more than numbers on a chart, it is reflective of and also impacts the economy as a whole.
[00:06:04] If India has to achieve a healthy economy, it absolutely has to manage the rupee's volatility.