March 12, 2022
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
Earlier this week, the Indian rupee hit a lifetime low as the Russian invasion of Ukraine raged on, crude oil prices soared and the spectre of even higher inflation than what we’re experiencing now loomed large. The value the rupee commands internationally is a barometer of the faith in the Indian economy, of course, but what does a falling rupee mean for you? How does it impact your finances and day-to-day lives?
The rupee has been one of Asia’s worst performing currencies in recent times anyway and the recent shocks have only made things worse. So, let’s take a look at the broader economic impact first. A weakening rupee makes India’s imports costlier. India is already the world’s third largest importer of oil and so it will make fuel more expensive. Given the role fuel plays across the economy, the price rise will have wider implications.
Your cost of living will be the first casualty. For instance, your daily commute and everyday activities will get more expensive. The rise in fuel prices also directly impacts the prices of daily consumption items, such as milk, vegetables, fruits, grains and eggs. Don’t forget, India is already reeling from high inflation. Now, you’ll have to further readjust your budget.
Imported products and commodities that need raw materials from abroad will get more expensive too. These range from products like soaps and shampoos to cars and electronic goods that depend on imported components. You might need to slash discretionary spends like those on entertainment and travel in order to offset the hike in prices of essential items.
The Reserve Bank of India estimates that for every 5% fall in the price of the rupee, retail inflation rises by 20 basis points.
A sharp rise in retail inflation, which is almost a certainty, will be detrimental to GDP growth at a time when India can least afford it. This is because the rise in prices negatively affects demand. The country is only just recovering from the economic setback of COVID-19, which led to severe job losses and businesses shutdowns, so the timing couldn’t be worse.
The rupee’s fall may also mean a shrinking of salaries in some industries that are dependent on imports. This is because a weaker rupee means higher production and operation costs for them. These companies would either lay off staff or cut salaries in order to stay afloat. They may even freeze hiring and pay hikes.
What about your investments, especially equity? What happens to them?
If foreign institutional investors start exiting, it would lead to a fall in stock indices – as we saw earlier this week – and therefore a reduction in the value of the shares you hold. The Reserve Bank may be forced to raise interest rates in order to curb inflation, which will hurt businesses in terms of costs and growth. And companies with foreign debt will most certainly suffer because they’ll need to pay more to service it.
So, you’re better off sticking with tried and tested sectors like IT, pharmaceuticals and fast moving consumer goods for now. Avoid interest rate-sensitive sectors like real estate and infrastructure. Since rupee depreciations tend to compound asset quality issues, focus on well-run private-sector banks or those public-sector banks with great asset quality.
If you’re not familiar with how the stock market works, invest via mutual funds.
A falling rupee also impacts those studying abroad. It means students will have to shell out more rupees for every dollar spent in fees and living expenses. So, if they spent Rs 65 per dollar in 2017, they will now have to spend more than Rs 75 today – an increase that will hurt. So, the latest fall in the rupee’s value could affect the more than two lakh Indian students studying in the US.
It is estimated that the collective cost of tuition and hostel fees for Indian students abroad shot up 44% from $1.9 billion in 2013-14 to $2.8 billion in 2017-18. At that time, the cost of living alone was $600 to $800 per month per student, depending on the location, and today it’s well over that.
Counsellors have long warned students to take into account currency fluctuations. They point out that many who don’t do that are forced to return because they go broke halfway through their courses.
Parents, the counsellors say, should transfer money for expenses every quarter rather than all at once so that they can average out the price.
A falling rupee would also foreign travel costlier too. You would shell out more at restaurants, for purchases and for train or taxi rides. If you were travelling on a tight budget, you might now need to cut down on destinations, downgrade your hotel stays and purchase less.
So, how can India ensure that rupee remains competitive? One short-term solution is for the Reserve Bank to start buying the currency and thus make it stronger. But, in the long term, reducing our dependence on imports and attracting foreign direct investment consistently through a better managed economy is the answer.
Most of us go through our lives either not understanding how the rupee’s fall affects us or thinking that it doesn’t mean anything to our lives. Actually, it affects us profoundly. Be prepared by becoming aware, and you’ll be better placed to manage the effects of a falling rupee on your finances.
Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at firstname.lastname@example.org. Catch you again soon.