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Rupee hits an all-time low: Is it good or bad for you?

By on October 12, 2018 in Announcement, Editor's Desk with 0 Comments

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Till the beginning of 2018, the Indian Rupee was one of the resilient currencies in the world. But, since last few months, it has tumbled down 6 percent approximately in value against the US dollar. In case you are wondering, what ‘Rupee Depreciation’ really means and is it good or bad for you, keep reading to know more.

What is Rupee Depreciation?

Depreciation stands for the decrease in the value of rupee against the US dollar due to the floating exchange rate. It means that the INR has become less valuable with respect to the US dollar. Falling of rupee against dollar can be simply explained as shelling out of more domestic currency for the same amount of dollar as before. For example earlier in 2017 when you spent 64 rupees for 1 dollar, now in October 2018 you need to spend 74.48 rupees for the same 1 dollar. This decrease in value of rupee from 64 to 74.48 is termed as depreciation of rupees against one US dollar.

Why Indian Rupee is Falling Against the US Dollar?

There are many reasons which are responsible for the continual drop in the value of rupees including higher crude oil prices, widening trade deficit, and higher capital outflows. Let’s know more about this below :

Dependency on oil import

After the US and China, India is the 3rd largest crude oil importing nation in the world. India presently imports more than 80% of its crude oil requirements which makes it more vulnerable to changes in the international oil market. For instance, if the crude oil prices increase in the International market, total import cost for us will also increase. This, in turn, will affect our current account balance as well as the currency market.

The Lira connection

The middle-eastern country, Turkey, is going through a financial crisis right now due to its strained relations with the US. Owing to this, Turkish currency, ‘Lira’ has fallen 40 % against the US Dollar in the first half of this year. As we already know that the turmoils of a financial crunch in a country don’t stay restricted to the national borders, hence, the continuous slump in lira has sparked fresh concerns in the global market about its spillover effects. Indian investors along with investors of other developing nations have more reasons to worry now as other emerging economies seem to be most vulnerable due to lira erosion.

Huge current account deficit

In June 2018, our country’s current account deficit rose to 42%, approximately $160 billion. Current account deficit implies the difference between imports and exports of goods and service of a country. The dependency on crude oil imports and its increasing cost, as discussed above is affecting our current account health badly, making the deficit even larger.

US Fed (Federal Funds) rate changes

Since the national economies correlate, the effects of US Fed rate hikes, which has been done 4 times this year also affects the Indian market. A hike in the fed rates has strengthened the US Dollar and in turn, has led to a depreciation of the Indian currency.

The global market: The United States and China Trade War

Two of the world’s largest economies, the US and China are experiencing a trade war and this has surely affected the global economy. While the ball could fall on either side of the court for India, however, the situation has surely created a growing unease among the global investors and the Indian economists.

The Good Effect of the falling Rupee

The depreciation of the Indian currency is a boon for the export traders. With export rates becoming cheaper, the market for foreign competitors has increased and now, more and more people are willing to trade with India.

As the value of rupees has depreciated against the US dollar, traveling to India has become comparatively cheaper and this is definitely going to boost the tourism industry in our country. Also, during this period, people working abroad can gain more by sending money to their homeland.

The Bad Effect of the falling Rupee

Fuel price hike:

Since the depreciation in the value of rupees, a steep rise in the cost of petrol and diesel has been observed. The price of fuel rising every other day is adding to the woes of the common people.

Impact on grocery bill:

The rise in the cost of petrol & diesel is indirectly affecting the cost of the daily essentials. With the upward march of fuel prices, the cost of transportation has increased. So, cost of goods that are transported from one part of the country to another, like food, beverages, and other FMCG products, are bound to rise which in turn will directly impact on the budget of every household.

Foreign education becomes costlier:

The strong position of USD against INR has posed a grave situation for those parents who have sent their children to a foreign land for study. With higher exchange cost, it has become difficult for parents to pay off the increasing amount of education loans.

Impact on jobs:

This situation has also impacted companies depending upon imports as now, they will have to face an increase in the cost of production & operations. Such companies are rationalizing their cost by either fewer hirings or by salary reduction of the employees.

A decline in foreign tourism:

With the hike in fuel prices, the airfares have soared high as well. Moreover, the cost of food, stay and other amenities for foreign tourism have also increased. Hence, there has been an immense decline in foreign tourism, specifically in countries where the currency is the dollar.

Entertainment affected:

Items that we use for our comfort and luxuries like mobiles, television, laptops and other electronic gadgets that are imported from other countries have become costlier. The rise in the price of consumer electronics has directly impacted the pockets of the common people.

 

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