At the time of writing this article, the rupee recently fell to a new low of ₹81.64 against the dollar. Over the past few years, the value of the rupee against the dollar has steadily declined. Financial experts believe there are several reasons behind this, the Ukraine and Russia war as well as the US Federal Reserve raising interest rates being the major ones. So how does the falling rupee impact the Indian economy and the average citizens? Let’s try and understand.
Why Has The Rupee Fallen So Low?
As mentioned, there is a multitude of factors that have led to the devaluation of the rupee against the dollar. The rise in fuel and energy prices, investors selling Indian stocks to buy foreign ones and a strengthening of the dollar across the world are a few to name. As inflation rises across the world and domestic growth slows, investors are looking to sell their Indian assets and put the money into the US markets for better safety and returns. Not just in India, but investors across the world have been doing this, thereby increasing the value of the dollar worldwide.said Jyoti Prakash Gadia, Managing Director, Resurgent India, a few months ago.
“The rupee is falling against the dollar primarily because of the growing trade deficit - imports are increasing at a much higher pace than exports. The increase in imports is mainly due to a sharp increase in oil prices following the Ukraine crisis. The increase in the import bill for coal and other essential commodities particularly raw materials has bloated the import bill. A weaker rupee will make these imports more expensive, which will have a short-term negative effect on domestic production and GDP as a whole,”said Jyoti Prakash Gadia, Managing Director, Resurgent India, a few months ago.
Impact Of The Falling Rupee
As an increasing amount of money flows out of India, the rupee to dollar rate gets impacted, further depreciating the value of the rupee. As the value of the rupee falls, the government, Indian companies, and citizens are forced to pay ever-increasing amounts of money, which directly results in inflation. India imports more than 80% of its total crude oil. As the price of fuel rises, it also raises the prices of almost all the other goods and products sold in India. When the price of the rupee falls, importing goods and raw materials becomes increasingly expensive. Moreover, if the prices of crude oil continue to rise, there is a possibility that the falling of the rupee will continue. Thus, inflation in the country would continue to rise as well. Financial experts expect the RBI to increase rates in order to battle rising inflation.
As the value of the rupee falls, the goods and products under the following sector are expected to become more expensive:
Fuel-Oil and Gas: As mentioned above, India imports more than 80% of the total oil and gas it consumes. As the rate of the rupee keeps falling, oil and gas corporations have to pay an ever-increasing amount of money to continue buying these resources. As a result, the selling price of oil and gas is increased in the Indian markets.
FMCG: As the prices of these fuels rise, the input costs of manufacturers involved in the FMCG industry also go up since they have to pay more for transport, packaging, etc. As a result, FMCG manufacturers also increase the prices of their goods and products that are sold in the Indian markets.
Electronics: A very large proportion of total electronic products used in India are directly imported from other countries. Moreover, even for electronic goods that are produced in India, a large percentage of the components used are imported. As the price of the rupee falls, manufacturers and consumers have to pay more money to buy imported electronic products.
Telecommunication Services: A large portion of the telecommunication infrastructure built in India is done by importing a variety of network equipment and technology. As the price of the rupee falls, telecom companies have to spend increasing amounts to import the infrastructure needed to support communication. As a result, telecom services can be expected to become more expensive.
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