The rupee has broken a psychological barrier as it tanks to Rs 90 against the dollar. This is a key storm in the currency markets, affecting households, businesses and investors. Why the fall is happening and how it affects lives can be an eye-opener for every one who comes in contact with economy — be it while deciding whether to stash their hard-earned money in savings bank, plan a foreign trip or yes investment.
Why the Rupee Is Falling
There are multiple reasons for the rate of decline of the rupee. “It represent the difference in interest rate between India and U.S. that has widened most.” The US Federal Reserve has kept interest rates relatively high to keep inflation in check, which has made dollar-based assets more attractive for international investors. This capital movement to the US pushes up dollar, thus making emerging market currencies like the rupee weaker.
The country’s trade deficit is another factor. India imports large amounts of crude oil, machinery, electronics and other items. When you import more than you export, you create excess demand for foreign currency. Oil is the big pendulum here, India’s economy being especially sensitive to changes in global crude. Rising crude prices raise import bills, hurting the rupee.
How It Impacts Your Wallet, Travel, and Investments
Also impacting currency are foreign investment flows. They have tended to withdraw the money when global interest rates increase or when risk appetite sours. Redemption of FPIs in Indian equities and debt markets will reduce demand for rupee, which may impact the value of the currency. Geopolitical rivalries, shifts in global trade relationships and investor sentiment just add to the volatility.
The central bank Reserve Bank of India (RBI) is actively intervening to have a say in the value of rupee combined with interest rate policy, foreign exchange reserves and market intervention. Although the RBI has a strong arsenal, forces beyond its control such as global dollar strength or spikes in oil prices can sometimes trump domestic measures at least in the very short run.
Why does this matter to YOU? A falling rupee makes imported goods and services costlier. Computer and some luxury goods and imported vehicles could also get more expensive. Backpackers will find foreign trips more expensive, as exchange rates rise. Study abroad can also get more expensive, affecting families who are saving for study overseas.
But there are some parts of the economy that may actually gain from a softer rupee at home. Exporters get a bump, as their goods become less expensive for foreign buyers. IT services, engineering exports and the pharmaceutical sector typically earn better margins when INR loses value. Investors in these areas might still fare well even as the broader economy struggles.
One of these other concerns is inflation. Increased imported inflation, spurred by more expensive imports, can also inflate consumer prices by pushing up the cost of essentials like fuel, food and medicine. Caretakers of the rate have been vigilant in weighing options and the need to support the rupee against measures required to curtail domestic inflation levels.
The rupee’s depreciation is a risk and an opportunity for investors. Fluctuations in currency value can affect the return on foreign investments (including mutual funds, stocks and bonds denominated in a foreign currency), especially over short periods of time. Hedging or diversifying your portfolio can aid to reduce risks of currency, but knowing the influences on the market is still important.
In sum, the rupee at Rs 90 per dollar is a complex phenomenon that emerges from global and domestic dynamics. Although it may curb consumer and tourist spending, it can also boost the fortunes of exporters and some sectors of investment. Remaining informed, tracking personal finances and understanding larger economic conditions can also help individuals manage the adverse consequences of currency movements.
