All the liquidity tightening measures taken by the Reserve Bank of India (RBI) and the positive and rosy image of the foreign direct investments painted by the Finance Minister seem to have been knocked straight out of the park. No matter what the Government and the RBI announced or did, it’s been one way traffic for rupee. The currency continued to fall to a new record low of 64.54 per dollar during Wednesday’s trading session.
Domestic currency finally recovered a little and closed 86 paisa down at Rs 64.11 per dollar. Heavy dollar demand from importers, continued capital outflows and expectations the US Federal Reserve would start withdrawing its bond-buying programme next month also weighed on the currency.
For days now, all what one gets to hear are concerns towards the continuous weakness and the implications it will have in the coming days. In an attempt to understand how this rupee weakness would impact the common man, The Pioneer analysed every segment on which the currency has either a negative or a positive impact.
The biggest challenge, which the Indian stock markets are facing, is the consistent out flow of foreign funds. In order to keep the currency stable, the country requires US dollars, which till now mostly came in form of investments in the Indian markets.
But with currency depreciating, these foreign funds have switched their game plan. They are not investing any more, rather hey are taking out their money. This is being done to avoid any further loss, which they now have to take when they convert the currency from sale of their investments to US dollars. These international investors have to pay more rupees in exchange of fewer dollars. Now foreign funds again being converted to dollars and taken out of the country have further weakened the currency exchange rate.
Another area of concern is the petroleum imports. Currently, the country buys 80 per cent of crude oil from international markets for which the payments are made in US dollars. Now with currency depreciating, the companies have to shell out more money to purchase crude oil. Weak rupee is going to increase the burden on oil marketing companies (OMCs). With petrol being deregulated and diesel under partial deregulation, OMCs for sure, will pass on this burden to their customers.
Now after the fuel cost goes up, so will inflation. As most of the goods are transported around the country from one region to another it will lead to rise of fuel bills of transportation companies forcing them to hike transportation changes. This trend of price rise will finally have to be absorbed by the general public, who will be forced to pay more for daily necessity items.
Inflation, in turn, would reduce the hopes of a rate cut by the RBI in the coming monetary policy. With the rise in inflation, RBI will not be left with much room to be able to announce a rate cut. And, in case of interest rates kept unchanged, pressure would further increase on the borrowers, who already have been facing difficulties due to high interest rates.
Current account deficit (CAD) is another reason that has been haunting the stock as well as currency markets for days now. Weak rupee will only add to the country’s import bills thus widening the CAD, which already has been under pressure from a lower revenue growth. Country’s CAD in FY13 stood at an all time high of 4.8 per cent of the GDP and if the currency continues to depreciate, country’s CAD could rise even more. Fear of rising CAD has already dented the sentiments of FDIs, who are now avoiding frsh investments in the country.
Another section, which is hampered due to the slid in rupee, is of imports. Importers will have to bear the burns due to the falling currency as they will now be forced to pay more rupees on importing products. This will add more burdens on their balance sheets, a burden which they will pass on it their customers by hiking prices of products. PC, laptop, mobile phone and tablet makers might soon be increasing the prices as most of the IT hardware used in the products are imported from foreign markets.
Students studying abroad would also feel the pinch due to the currency depreciation. living in foreign countries, most of them survive on a limited budget, which will be disrupted. The expenses towards education will shoot up as now more money would be required and the cost of livings would also shoot up. Tourism industry won’t be able to escape from this vicious cycle. Due to a huge fall in the currency, tourism from the country to foreign destinations would dry up. As people will avoid going on exotic foreign vacations simply because of the rise in costs of food, hotel and travel abroad.
The only two sections of the economy, which are relaxed and enjoying the currency depreciation are exporters and information technology companies. A feeble rupee means good news for the exporters as goods exported abroad would fetch dollars which when converted would result in substantial rise in rupees. Also, a weak rupee will make Indian produce more competitive in global markets which will be fruitful for India’s exports. Over all, no matter how much damage the depreciating rupee may cause to companies, the final burden would only fall on the common man, who will have to pay more for fuel or fares of buses, trains and flights would go up.