The Indian rupee fell to an all time low versus
the dollar as the greenback grew stronger against major international
currencies.
Selling
of debt by foreign institutional investors, a continuous demand for dollar from
banks and importers owing to a higher dollar in the global market are
considered to be major reasons affecting the value of rupee against the
greenback. The rupee has dropped nearly eight percent against the dollar since
May 2013. Reuters
reported that foreign institutional investors provisionally sold 8.85 billion
rupees worth of Indian stocks on Tuesday, marking their biggest single-day sale
since February 28, according to exchange and regulatory data. India’s
political state of affairs, current account deficit and high inflation are some
concerns why rupee could possibly depreciate further.
However,
the Reserve Bank of India’s intervention is expected to stabilize this
roller-coaster rupee ride over the next few days. While
addressing a press conference, Chief Economic Advisor in the Finance Ministry,
Raghuram Rajan, mentioned that the market regulator Securities and Exchange
Board of India and the Reserve Bank of India would take "warranted"
action to control the rupee slide.
As we
speculate rupee’s direction, here’s a look at the impact of currency
depreciation on the country’s economy.
Interest rates
With a
weak Indian rupee, it may be difficult for the RBI to cut interest rates at the
monetary policy meeting next week. India’s dependency on foreign investors to
bring inflows in order to bridge current account deficit is one of the key
factors that will be considered for interest rate changes.
Indranil
Sengupta, chief economist at Bank of America Merrill Lynch argues that the RBI
should cut interest rate despite the weak rupee, reported moneycontrol.com.
"Keeping rates high on the ground of defending the rupee, at least will
likely only further defer recovery, deter FII equity inflows, delay
re-accumulation of FX reserves and depreciate the rupee. A 10% depreciation
impacts inflation by100 basis points," he said in a note to clients.
Education
A weak
rupee can weigh down your chances of studying abroad. Since students borrow
education loans in local currency and spend in foreign currency, you will have
to shell out more rupees to buy the dollar which would make accommodation, food
and cost of education abroad costly.
Travel
If you
are planning to travel while the rupee is weak, you may want to reconsider as
air fares will be expensive considering an increase in fuel surcharge. Also,
eating out when you are traveling overseas will turn out to be costly because
you will end up spending more rupees.
Loans
Depreciation
of rupee will impact loan seekers in a big way. If you apply for a car loan,
you will have to pay more depending on where the vehicle is assembled and the
components imported by the automobile company.
Oil prices
Rupee
depreciation may prompt oil companies to hike petrol and diesel prices. India
is highly dependent on importing oil and companies will have to shell out more
money to import crude in dollars.
Inflation
A weak
currency will increase the price of imports which will translate into an increase
in the prices of consumer products. Depreciating rupee will also cause an
increase in inflation.
Imports
A
falling rupee makes imports more expensive in terms of rupees. India is a major
importer of oil, gold and iron ore among other things, and more money spent on
imports will show up in inflation data which in turn will lead to increase in
electronics, fuel prices and consumer products.
Exports
On the
bright side, rupee depreciation will help increase India’s export
competitiveness especially with other emerging Asian markets like China and
Korea. But, a weak rupee alone may not boost the country’s exports.
The Wall Street Journal quoted Duvvuri Subbarao
referring to a sharp drop in the rupee's value against the dollar last week. He
said, “We need to get export competitiveness by increasing our productivity, by
increasing our competitiveness in other ways, not by the exchange rate."
Companies
Considering
India’s reliance for raw materials from overseas, a weaker rupee affects the
profits of companies. While IT and pharma sector gain from a weak rupee, it
might be trouble for aviation.
Its
good news for a few IT companies operating in India because most of the
countries tech firms gain revenue from the US, a weak rupee can help them earn
relatively more. Pharmaceuticals companies in the doing business in the country
will gain when rupee depreciates because they export more than they import. On
the other hand, aviation sector will be disappointed with a weak rupee because
most of their earnings are in rupees while they spend in dollars.
Real Estate
While
the local markets may become bleak, it’s good news for NRIs. Non-resident
Indians can purchase a home for a low price because a weak rupee means more
value for every dollar they spend. The rupee’s dip against the dollar will help
Indians living abroad to purchase properties in their homeland as they can buy
more rupees.
By MOWNA RAVIKUMAR
Courtesy- Yahoo Finance
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