Continuing its depreciation for yet another session, the rupee declined to record low level of 80 against the US dollar during intra-day trade. It then recovered some lost ground to close at 79.97 a dollar.
The local currency has now declined over 7 per cent since the start of this year. It was at Rs 78.94 per dollar as of June 30 and rapidly plunged to touch the Rs 80-mark in the next few sessions.
If we compare with historical data, since December 2014, the value of the rupee declined from 63.33 against a dollar on December 31, 2014, to 79.97 today — that is, a depreciation of 26.27 per cent.
However, rupee’s loss meant gains for the US dollar. In fact, the US currency has had a wonderful stretch. Since the start of the year, it has gained almost 8 per cent.
On the flip side, a rising dollar is surely not a favourable scenario for Indian rupee. The rupee has been staggering since the beginning of the year and has fallen 7.6 per cent so far.
The surprise rate hike by Reserve Bank of India’s (RBI) monetary policy committee (MPC) last month could not stop rupee’s decline as a widening current account deficit came to the forefront after the country’s June trade deficit hit a record high, raising concerns. In fact, it seems to have heightened volatility.
What led to rupee’s fall
The geopolitical crisis and related uncertainties in wake of the Russia-Ukraine war has added to the woes of most economies, at a time when they were looking to recover from the slump caused bby Covid-19 in the last 2 years.
Amid concerns over growth, high global crude oil prices and soaring inflation, the central banks of most major economies are stumbling to curb the fall of its currency against the US dollar.
The tightening of such global financial conditions amidst Russia’s invasion of Ukraine are the major reasons for the weakening of the Indian rupee.
Besides, outflow of foreign portfolio capital is also one of the major reason for depreciation in Indian currency. Foreign portfolio investors (FPIs) have withdrawn about $14 billion from Indian equity markets in 2022-23 so far.
It is to be noted that monetary tightening in advanced economies, particularly in the United States, tends to cause foreign investors to withdraw funds from emerging markets.
The US Federal Reserve has already started raising key interest rates in order to tame inflation that surged to 9 per cent last month. A high inflation reading fuelled fears that the Fed may increase interest rates by a supersized 100 basis points hike at its policy-setting meeting later this month.
How it may impact you
The primary and immediate impact of a depreciating rupee is on the importers as they need to spend more for same quantity and price.
The basket of Indian imports includes crude oil, coal, plastic material, chemicals, electronic goods, vegetable oil, fertiliser, machinery, gold, pearls, precious and semi-precious stones, and iron and steel.
With the dip in the rupee, importing items will get more expensive. Not just oil but electronic items, such as mobile phones, some cars and appliances, are likely to get expensive.
The falling rupee is also most likely to impact spending decisions of households as certain things may become expensive.
For people looking to study abroad during this time, the fees amount will rise as a dollar would now cost more in terms of rupee than earlier. Prospective students or even existing ones may face a hike in their spending.
In terms of remittances, or the money that people residing abroad send to their families back home in India, it would cost more as they will end up sending more in terms of rupee.
Another major impact of falling rupee might be felt on the tourism sector. With Covid-19 cases remaining in control, many people would want to resume their abroad travel plans. Such people might end up spending much higher than they would have a few days back.
On the flip side, exports from India will become cheaper. It is a boon for the exporters as they receive more rupees in exchange for dollars.
(With inputs from agencies)