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Thursday, 22 August 2013

How fall of Rupee impacts you

22:58 Posted by vijay pasham No comments
How depreciation of Rupee impacts common man:

Moving from bad to worse, the Indian rupee hit new historic low of 65.56 against the US dollar in intraday trade Thursday on sluggish local stocks and continued dollar demand from importers.

Deutsche Bank has said in a note 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.

To restrict the outflow of foreign currency, RBI had, however, on August 14 announced stern measures, including curbs on Indian firms investing abroad and on outward remittances by resident Indians.

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 programme 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.

The government is dependent on foreign countries for several commodities like Petroleum,Gold and other imp exports. Every time the Rupee looses its value against the dollar, government is bound to shell out more to pay the foreign countries. Up-to certain extent government might tolerate this but beyond that they have no choice but to extract the overhead amount from consumers i.e. the common man. So bottom-line is when rupee is loosing its value in international market,the commodities that are imported are bound to get expensive sooner or later.

Effect to general public will come in the forms of -
  • Prices of imported stuff such as oil and electronic items will go up.
  • Increased cost of Imported goods (Mobile phones, Crude Oil, Gold etc.)
  • The share market will be down with the weak rupee, as it will decrease corporate profits who import their raw materials.
  • With depreciating rupee value, there is no respite for common man from the harsh reality of double-digit inflation and price rise. Pulses and vegetable prices are going through the roof with just last week onions touching Rs 80/kg.
  • As transport cost goes up, the price of food, consumer durables and fast-moving consumer goods will also be hiked in tandem.
  • There is high pressure on automobile manufacturers as many components are imported and they need to shell out more than what they did a year ago.
  • The prices of the products where vegetable oil is a key ingredient, like soaps and detergents, will be hiked due to higher manufacturing cost.
  • The worst hit are the students planning to go abroad for higher studies. Now, a two-year MS course in the US would cost Rs 15-25 lakh against Rs 11-12 lakh if the rupee value was 55,this also concerns Indian tourists as conversion rates is high.
  • Consumers are the worst hit with cost of gadgets and consumer durables going up. Panasonic and LG have already announced a price hike.
  • Thermal coal which is used for the generation of electricity is India's major import. Due to the depreciating value of rupee, the costs for power generating units gets increased which would lead to high electricity bills for consumers.
However, the only gainers are the

IT companies: A movement of rupee in the exchange rate will have an impact of 40 basis points on the U.S. portion of the revenue of an IT company. Simply put, for 1 per cent fall in the rupee’s value, their profit is expected to see a hike of 50 to 110 basis points. One basis point is one hundredth of a percentage point.

Overseas Indians: Money saved is money earned. Depreciation of rupee is certainly a good news for the overseas Indians. Those working abroad can gain more on remitting money to their homeland,If you spend in USD, rupee depreciation shouldn't be of any concern to you because you are both earning and spending in usd and rupee isnt in the equation. If you wish to return to India and have plans of converting USD to INR and spending it here then personally you should be happy for the time being because you have more to spend. This would be temporary because rupee depreciation will be reflected in rising prices of domestic goods, given some time, due to rising costs of imports( since we pay for them in USD) and labour wages. 
Of course it certainly depends on what you want to buy. For example if its fuel or gold whose price is determined internationally you may not have definitive advantage. On the contrary for goods that are not so correlated to international markets you may have partial advantage due to depreciation.

Read "Stop Using Cars For 7 Days" to know how to stop this depreciation of Rupee.  

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