- Date : 26/01/2022
- Read: 3 mins
There can be both losers and gainers from rupee depreciation.
The exchange rate stood at 76.25 INR to 1 USD on 16 December 2021, sliding below the 76-mark for the first time since June 2020, though it gained somewhat over the following month to close at 74.24 on 17 January 2022. But overall, in the last three months, the rupee has depreciated close to 5% against the US dollar.
The question is: can a falling rupee have any significance? And why does it fluctuate? The answer is: yes, it is indeed significant, as it can impact various aspects of the economy, including our personal finance. As to why it fluctuates, let’s look at the specifics.
Why currencies fluctuate?
Unlike several world currencies such as the Saudi or the Qatari rial, the Indian rupee is not pegged to the dollar. Instead, we follow a flexible floating exchange rate system.
This means our currency floats on the foreign exchange market, with free market forces of demand and supply determining its exchange rate against foreign currencies. Naturally, the worth of the rupee against the dollar also changes.
Several factors impact the rupee’s exchange rate (i.e. fluctuations), such as:
- India’s public debt amount;
- The inflation rate;
- Interest rates;
- Employment numbers;
- Economic growth;
- Equity markets, and,
- Trade deficits/surpluses (among others).
When the rupee depreciated beyond the 76-mark earlier - in March 2020 - it was because of the unexpected outbreak of COVID-19. But this time, a widening trade deficit and pull out by foreign investors from the equity markets are responsible.
Impact of a depreciating rupee
What happens if the rupee falls? As stated earlier, it has an impact on our lives and our finances. But do bear in mind that the impact of rupee depreciation does not necessarily have to be adverse; there can be both losers and gainers from it.
The immediate sufferers will be businesses that depend on imports and then the users of those imported goods. This is so because the USD vs INR equation comes into play; for every dollar of the price of a product, the importer pays more in rupees.
As much as 67% of India’s total pharmaceutical raw material imports came from China in 2019. For certain drugs like antibiotics or penicillin, the raw material component is 90%. So, a rupee slide will make medicines more expensive as the cost of imports will go up.
Similarly, other end-products will become more expensive when import costs of capital goods and essential commodities (such as iron and steel, coal, fertiliser) rise. Travel costs would also rise as we buy crude with dollars.
This means even domestic fuel prices will rise, which would push up the cost of other essential items. This will put pressure on your personal finances.
People travelling abroad for foreign education, business, leisure, investing, or medical treatment will find dollars more expensive in rupee terms.
Also Read: History Of Indian Currency
On the other hand, exporters will gain as their dollar earnings will mean more rupee value. People receiving remittances in dollars will also benefit, as will tourists coming to India, as the dollars they carry with them buys more rupees.
For much the same reason, NRIs investing in India will also benefit from the falling rupee.