What Happens When Rupee Depreciates
What happens when rupee falls? This is a very common question but many people has a myth that – when rupee goes up, it is good sign for Indian economy. But in reality depreciating Indian rupee, impacts the economy negatively and inflates the cost of fuel, commodities, foreign travel and many other things especially when rupee depreciates against US dollar which is considered a dominant and stable global currency. In simple term we can say that for every dollar, you have to pay more India rupees. So let’s see how depreciation in rupee affects a common man in India:
- Crude Oil: Weakening of Indian rupee affects the Indian economy badly, as government has to pay more for buying crude oil from foreign countries resulting in higher import bill. Since India relies heavily on import of oil nearly 70%-75% more than the requirement, government has no alternative than inflating the prices of all the directly linked commodities such as petrol, diesel etc.
- Necessary Commodities: Similar to the price of oil, when rupee goes down the import cost of all the raw materials rises. This includes buying of FMCG goods, edible oils, electronic items like laptops, smartphones and many others. Also due to increase in fuel cost, transportation cost increases which forces transporters to increase their freight charges.
- Abroad Education Cost: Considered to be a worst nightmare for Indian student going abroad for studies especially in the US. This is because students will have to shell out more on their tuition fees and their living expenses. And since students mostly rely on educational loans, they’ll have to borrow more in order pay back in dollar. In fact, this has given rise to Indian students switching to countries offering high quality education at a low cost such as Singapore, New Zealand, Australia to name a few. So as rupee falls, burden on students increases as their day to day expenses are in dollars whereas the borrowing is in Indian rupee. Read more on how to plan and arrange money for abroad studies
- Foreign Travel: There is a direct relation between a fall in rupee and air travel cost. In simple way we can say that – increased fuel cost results in flight fares to go up. And this straight away impacts travellers pocket, as they’ll have to pay more for accommodation and travelling in the foreign countries. In order to reduce the spend on foreign travel, people can book their air tickets and hotel in advance. Doing this can save considerable amount of money although they’ll have to pay higher for shopping, food and internal travelling.
- Stock Market: Appreciation of US dollar reduces the money flow into the Indian stock market. Since foreign institutional investors lose interest in Indian markets they withdraw their money from the market and start investing in profitable markets. Due to this withdrawal which takes place in crores, individual investors too start losing faith in the market. However in such a scenario, investors should look positively in stocks of IT, pharmaceuticals, textiles, tourism and other export oriented companies. This happens because reduced export prices results in more selling from these companies.
- Job Cuts: Due to rise in import costs, companies have to balance their expenditures by slashing the pay checks or keeping the salaries constant. And in the worst case scenario, job cuts/no hiring is the final alternative as operational expenses of the companies increases.