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What happens to your money when Rupee falls


News headlines often tell us about the Rupee’s value dropping to a new all-time low against the US dollar. This basically means that one has to spend even more in terms of India’s currency to buy US dollars. On Monday, the exchange rate broke the Rs 77 barrier.

Suppose we avoid the temptation of getting into the slugfest between the two sections defending and criticising the central government for the slide. In that case, we can address a crucial citizen-centric question: what happens to our money every time the Rupee falls?

But before we get there, it may help to address some other questions. One may ask: why is the Rupee’s value determined against the US Dollar’s and why can’t any other country’s currency be the benchmark?

THE DOLLAR BENCHMARK

The US Dollar has become the global currency. Both the US Dollar and the Euro are popular and accepted in international markets. The US Dollar’s share of foreign currencies in international banks is more than 64 per cent. For the Euro, it’s about 20 per cent. The US Dollar reflects the strength of America’s economy.

In 85 per cent of international trade, including crude oil, the US Dollar is involved. About 40 per cent of loans globally are sanctioned in dollars. On the other hand, the 180-odd other currencies in the world are mostly used within their countries.

Read: Rupee hits record low against US dollar, 2nd time this week

This leads us to two more questions: Why has the US Dollar always been stronger than the Rupee—just rewind to the time when you started following the news—and why has the gap been widening?

THE WIDENING GAP

When a commodity’s demand is high, its value will be more. Our imports from the US are more than what we export there. The dollars we get from the US are less than what we need to pay them for their goods. We need to buy more dollars from banks that represent a small unit in the vast foreign exchange market. This is how the superiority got established, and the gap kept widening.

THE CURRENT TRIGGER

The Ukraine war is a significant factor in the Rupee’s decline. Russia is the world’s second-biggest crude oil exporter. Naturally, supplies have been disrupted and prices spiked. And India is hit hard as it’s the world’s third-largest oil consumer behind the US and China.

But there are also other factors that weaken the Rupee. After the US, China is our biggest trade partner. Stringent lockdowns across various Chinese cities have badly affected economic activity there. India is naturally bearing the brunt.

The Rupee also falls when foreign portfolio investors pull out money from the stock and bond markets. This time they are doing it because of the global uncertainties caused by Ukraine’s invasion by Russia. Also, the strengthening of the Dollar in line with expectations of better growth in the US economy has pressured the Rupee.

Then, we all complain about the price rise. Prices rise when there are not enough goods, leading to a demand-supply gap. Or when money is in greater supply in the economy, but we cannot get what we want. This reduces the purchasing power of our currency.

Read: Three reasons why Rupee is falling against Dollar

IMPACT ON YOU

You may think you have or are earning the same amount of money before the last depreciation in the Rupee’s value. So, you can buy the identical amounts of goods or services as before. Nothing has changed, right? It does not work like that. Let’s unpack this. First, look at a prominent factor that’s weakening our currency and also affecting us, even though indirectly.

High crude oil prices not only mean costlier petrol and diesel for private vehicle owners, but transportation of essential commodities, including fruits, vegetables, edible oil and foodgrains, also costs more. All this leads to inflation, and a depletion of our forex reserves because we’re sending out more dollars on crude oil. This reduces our ability to import other goods that we need. As we’re an import-oriented country, this leads to fewer and costlier foreign goods, and a further weakening of the Rupee. If you shop, you spend more.

Here is what the latest numbers say. India’s retail inflation based on the consumer price index (CPI) jumped to an 8-year high of 7.79 per cent in April, data released by the government showed on Thursday. Inflation numbers have now been above the upper limit of the RBI’s 2 per cent to 6 per cent tolerance band for four straight months. On the other hand, the country’s foreign exchange reserves declined by USD 28.05 billion to USD 607.31 billion at the end of March this year from USD 635.36 billion at the end of September 2021, according to an RBI report.

If you hold back spending, this causes demand for goods and services to go down – activities like construction, manufacturing and imports slow. Companies can hire fewer employees. The overall economy takes a hit. You feel the pinch of the Rupee’s slide.

Less workforce and machinery will be needed. The government will have a reduced capacity to spend on infrastructure building and other welfare projects. Investment goes down. This deepens the jobs crisis. And we know that it’s the common citizens who are hit the most.

A falling Rupee also makes your overseas education and travel costlier because your fees and tickets cost more in line with the Dollar value.

WHO DECIDES VALUE?

But who exactly decides the Rupee’s value? Is it the Indian government? The US? No one in particular really does.

Foreign currency exchange rates are floating and depend on daily market factors like demand and supply, with zero or little intervention from the countries involved. The more the demand, the greater the value.
For example, heavy imports, which mean more dollars purchased, decrease the value of our currency. Similarly, in the case of heavy exports, more dollars will flow into India and become cheaper for us to buy through the Rupee. Currency transactions take place in the foreign exchange market that was mentioned earlier in the piece.

WHEN SLIDE HELPS

But it’s not all doom and gloom about the Rupee’s depreciation. Non-resident Indians (NRIs), in countries such as the US, the UK or the UAE, can send more money home because of favourable exchange rates. NRIs can also take loans from abroad and invest in India.

On the other hand, a falling Rupee helps exporters receive more rupees in exchange for Dollars. In other words, it gives overseas buyers more purchasing power. But they also have to spend more by way of higher production and processing charges due to expensive imported raw materials like petroleum products, gems and jewellery, electronics and pharmaceuticals.

GOVT’S OPTIONS LIMITED

So, cannot the government do anything when there is a significant fall in the Rupee’s value? It can but the options are limited. The government can try to reverse the Rupee’s low demand by, through state-run banks, buying India’s currency from the market using US dollar reserves that it keeps. More dollars in circulation…



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