With all the talks about the ever sliding Rupee and the 69 jokes on the rupee, it has now become imperative that we do understand the implications of falling money. And as bad as it looks, there are a few bright sides to a depreciating rupee story, but mostly, for a trade deficit country like India, which imports way more than it exports, the fall is worrisome and, well, hugely detrimental to its economy, financial health and the most important of all, budget of its citizens! The implications are huge.
Usual discussions on the fall in the rupee bring up macro-economic, less understood matters such as slowing economic growth, corporate earnings and market volatility to our minds. However, the woes are much more real and visible to a common man, trying to earn a living. For the common man, the falling rupee is going to hit where it hurts the most-the pocket.
From essentials such as food and education to foreign vacation and the swanky gadget you plan to buy, the falling rupee will hurt the junta in more ways than one.
Moving from, well, pits to hell, the Indian rupee hit new historic low of 68.75 against the US dollar in intraday trade on Wednesday 28th August, on sluggish local stocks and continued dollar demand from importers. And adding to that, Deutsche Bank has said that the rupee may slide to 70 to the dollar in a month or so, although some revival is expected by the end of the year. I believe that the Rupee will slide a bit further down south, stabling at around 75 mark. Why? Because I don’t think RBI can do much to stem the fall. It cannot print dollars to fill the voracious hunger of banks and other institutions which are gobbling up dollars like a dementor sucks your emotions. Strong demand of US currency from importers and banks, continuous capital outflows, widening current account deficit and dollar's strength against other currencies overseas amid expectation that the Federal Reserve will soon taper its bond-buying program has put pressure on the rupee.
Whether the currency would find its stable level or will continue to slide further remains a tricky question. But till the currency settles itself, let’s have a look at how continuous depreciation of the Indian currency will affect the common man and the business fraternity. And to talk of that, let’s start with those who will actually be happy with this fall!
Exports: A feeble rupee will bring delight to the exporters as goods exported abroad will fetch dollars which in return will translate into more rupees. Also, a weak rupee will make Indian produce more competitive in global markets which will be fruitful for India's exports.And this is where we could have cashed on had we been a country which exports more than it imports or a trade surplus country. Sadly, we are not!
The NRIs: Depreciation of rupee is certainly good news for the overseas Indians. Those working abroad can gain more on remitting money to their homeland for the same amount of dollars! Ah, here comes the wave of NRI bridegrooms again!
And now for the sad part.
Imports: Buying imported stuff will become a very costly affair. You will have to shell out extra on imported goods. For example, if you bought a product valued USD 1, you paid around Rs 51 (months ago) but you will now have to shell out close to Rs 68 for the same product. And given the fact that we import even basic things like Chairs and Toys, we are sure to be toyed around! And I have not even started the amount of Gold we import. And combine that with high inflation that has been pinching you for more than a year now. Now, the weakening rupee has made( And will further make) crude oil, fertilisers, medicines and iron ore, which India imports in large quantities, costlier. Though these items are not for your daily consumption, they impact your finances indirectly.
The impact of rupee depreciation on the FMCG sector will be due to higher cost of imported raw materials. Companies like Unilever and P & G, will revise prices, adding to an already worrisome inflation. Pulses and oil, which account for a large part of India's imports, will also be affected. In fact, crude palm oil prices set the pace for prices of other edible oils. It is imported in large quantities and any rise in its price will add to the inflationary pressure. In fact, the depreciation of the rupee has considerably affected the price of the edible oil complex in a big way, as we import 60-70% of our requirements! For instance, in November-December 2011, the price of refined soya oil shot up by Rs 75 per 10 kg from Rs 651 to Rs 724. It is set to test the 800 level. Do you think these costs will be absorbed by companies? If you , then you are wrong. It will be passed to the consumers to maintain the profit levels.
And to talk about that favorite gadget of yours, electronic consumer goods such as computers, televisions, mobile phones, etc, with imported components will also become costlier. International food chains which run outlets in India are also not denying the impact on profitability.
Fuel price: How could this not come in the discussion? A weak rupee will increase the burden of Oil Marketing Companies (OMCs) and this will be passed on to the poor consumers .If the OMCs increase fuel prices, there will be a substantial increase in overall cost of transportation which will stoke up inflation. But one would be foolish to think that fuel price will have an impact only on one’s fuel bill. It will increase the cost of transportation of grocery items as well as vegetables and this in turn will lead to higher inflation. An increase in transport costs basically means higher inflation in almost everything!
These are the major affected areas. A few more areas, where the effect will be seen are:
RBI’s monetary policy: If the depreciation in rupee continues, it will further increase inflation. In such a situation RBI will have very less room to cut policy rates. No cut in policy rate will add to the borrower’s woes that are eagerly waiting to get rid of the high loan regime. One shivers at the 18% rate for personal loans and 11% for the home loans. What will happen if they shoot up?
Other concerns are for parents of students studying abroad and those planning to go outside the country for their vacations. They will have to shell out more than they had planned to!
And of course, the ever widening CAD. A frail rupee will add fuel to the rising import bill of the country and thereby increasing its current account deficit (CAD). A widening CAD is bound to pose a threat to the growth of overall economy.
In fact, combine this with the poorly planned Food Security Bill, the recipe has been set up for a disaster ahead. We better brace ourselves for the tornado that is going to hit us, unless we prepare for that and get the economy back on track. And for that, no better opportunity than the 2014 elections.
Time to get the Pseudo family out!
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