Ashraf Engineer
December 28, 2024
EPISODE TRANSCRIPT
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
It seems as if there is no floor to the depths the rupee can plumb these days. At regular intervals it has hit a new low, raising concerns about its impact on the Indian economy and the daily lives of citizens. It has become one of the central economic concerns of our times. Not everyone understands how profoundly a weakening rupee impacts our lives. It sends ripples across various sectors, affecting imports, exports as well as investor sentiment. Most importantly, it has a massive impact on the cost of living in India. Listen on to understand how.
SIGNATURE TUNE
First of all, currency weakness is an indicator of a cooling economy. The signs have all been there and we have been discussing them: rural distress, high unemployment, soaring inflation, declining exports and slowing foreign direct investment.
In this financial year, till July, exports were 6% lower than in the same period the previous year. FY24 saw foreign direct investment decline by 3.5% and foreign portfolio investors, or FPIs, withdrawing from India, thanks to an overpriced equity market. In August, FPIs pulled out more than $2.5 billion from Indian equities.
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. In FY24, India’s oil import bill was managed by heavily discounted Russian crude but in FY25 these discounts have been reducing.
Indeed, geopolitical tensions and related concerns have impacted the rupee. 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. As a result, these currencies depreciate while the dollar appreciates. Among these factors, other than the ones I’ve already mentioned, is the victory of Donald Trump in the US presidential election.
So, what does a weak rupee mean for you? At a broad level, it means a higher cost of living.
India relies heavily on imports, especially of crude oil, which accounts for a large part of our fuel consumption. So, India will land up paying more for the same amount of oil – in other words, it requires more rupees to buy the same amount of dollars it needs for the crude. Higher fuel costs are passed on to consumers and businesses. Costlier fuel raises the prices of essentials like vegetables because their transportation costs are now higher. This is what is known as import-induced inflation.
Rising inflation means your home budget gets tighter because you have to pay more to buy the same products, from groceries to transport, leaving you with less to spend on discretionary items or invest as savings. Many households are unable to make ends meet anymore.
Even electronics such as phones and laptops will become costlier since most of their components are imported.
Costlier crude also means air travel getting more expensive as well as plastics and fertilisers. The latter will impact an already embattled agriculture sector.
Those businesses that have foreign currency debt face higher repayment costs and those reliant on imports will have their profit margins squeezed.
Sectors that rely on metals and electronics will feel the pinch because their production relies heavily on imported commodities. Again, these commodities will cost more.
If you plan to study abroad or have a child whose education abroad you are financing, the rupee’s fall means your budget will have to expand to meet the expenses
Sectors like automobiles are also highly dependent on imports of raw material. A weak rupee increases the price of the finished product – which you pay for, of course. It might mean that you will need to put off buying that car or two-wheeler and automobile companies will face shrinking sales. Even if you buy the car, the higher cost of fuel will increase the cost of using it.
There are, of course, parts of the economy that benefit from a falling rupee.
Sectors like IT, metal and pharmaceuticals – which mainly export their offerings – would benefit because they would get more rupees for the dollars they charge.
Tourism too gets a boost as it gets cheaper for foreign travellers to visit India. It also gets us more foreign exchange and generates jobs. However, if you’re the one planning to travel abroad, it’s bad news because you will need more rupees for what you spend in foreign currency.
Through the wider macroeconomic lens, a depreciating rupee should improve the trade balance. The trade balance is the difference between the cost of imports and exports. Now, India’s imports have been always higher than its exports. So, when the rupee depreciates and we get more for the dollars we earn for our exports, the trade balance improves.
While this is a theoretical explanation, we find that in the real world a currency depreciation doesn’t do much for the trade balance.
Also, let’s be clear: currency depreciation by itself does not make exports more competitive. There are other critical factors such as demand, trade policies and the cost of production.
So, whose job is it to keep the currency stable? While it’s not solely the Reserve Bank of India’s responsibility, it plays a major role in managing the rupee’s volatility. It intervenes by either buying or selling foreign currency from its reserves. Such interventions stabilise the rupee and a stable rupee makes foreign investors more confident of investing in India.
Of course, the RBI has its own limitations. India’s forex reserves are healthy but that doesn’t mean it can keep using them to stabilise the rupee. As I mentioned, a weak currency leads to inflation, so the RBI would be cautious in lowering interest rates. This means credit does not become cheaper for businesses or you if you’re looking to buy a home or a car on loan. This, in turn, can cool growth and of course impact employment generation.
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. If India is to achieve a healthy economy, it absolutely has to manage the rupee’s volatility.
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 editor@allindiansmatter.in. Catch you again soon.
