Here’s The Cost You Will Pay If Rupee Continues To Depreciate Against Dollar

The Indian rupee (INR) fell by 14 paisa to 79.7 against the dollar at 10.13 am on September 2, 2022. Earlier this week, on Monday, the rupee fell to 80.15, and hit its all-time low figure against the dollar.

According to Karan Mehrishi, independent economist, the increasing component of import in terms of value in the gross domestic product (GDP) means that imports have a wide-ranging impact on the overall consumption pattern of a household. Since India is a commodity importing country, and this increased imports coupled with inflationary price rise and a depreciating rupee is increasing the wholesale price index (WPI) and the consumer price index (CPI), it is putting pressure on the average consumer’s monthly budget.

According to data from the Reserve Bank of India (RBI), for every 5 per cent fall in the value of the rupee, inflation increases by 0.15 per cent.

A volatile and depreciating rupee is bad for everyone, and coupled with higher inflation, it would mean more bad news for the common man.

Here Is How Your Life Could Be Impacted Due To These Economic Headwinds

Cost of Living To Go Up: India is an importer of lots of electronic goods and components, such as mobile phones, along with other consumables, such as fuels, fertilisers, base metals, among others.

To give an idea how much of an impact a depreciating rupee has on our lives, India imports 85 per cent of its crude oil requirements from foreign countries, and these are usually settled with payments in dollars. About 20 per cent of India’s GDP is made up of imports. In 2021, India spent around $57 billion on import of electric and electronic goods.

This is why a depreciating rupee makes the cost of living higher, since crude oil forms the raw material for end consumption products, such as petrol and diesel. Thus, the transportation cost increases. Adding further to that is that India also imports fertilisers, which spikes the cost of agriculture and cultivation, and together with the increased transportation cost of transporting crops, it adds to the overall price rise.

So, a depreciating rupee can lead to higher inflation, and consumers may have to bear the brunt, as these imports become dearer.

According to Mehrishi, when food and fuel prices, which form about 45 per cent of the CPI go up, the impact is significant on the consumers’ purchasing power.

Mehrishi also stated as to what might happen if companies aren’t able to absorb the inflationary price rise. They would pass them on to consumers, or decrease the size of their offerings, as some FMCG companies are doing now.

Foreign Education Cost To Go Up: The fall in value of rupee will directly impact those parents whose children are studying abroad. This is because parents have to shell out more rupees to buy the same quantity of dollars needed to fund their children’s education abroad.

“Cost of education for students pursuing higher studies abroad will go up with depreciation in rupee vis-a-vis dollars, because there is an increased chance of a faster rate hike in the US compared to India in the near future. This will see the rupee depreciating more,” says Vinod AN, general manager, treasury head, South Indian Bank.

Source: Refinitiv, an London Stock Exchange Group Entity

Why Has The Rupee Depreciated?

Sriram Iyer, senior research analyst, commodities and currencies, at Reliance Securities, a financial services company, pointed out that the rupee has currently depreciated because of several key factors, such as aggressive rate hike by the US Federal Reserve and other central banks in a bid to cool rising inflation, foreign institutional investors (FIIs) selling from the domestic capital markets, high domestic inflation, and so on. Hence, unless these factors turn favourable, the rupee will remain under pressure.

According to Aditi Gupta, economist, Bank of Baroda (BoB), the rupee is expected to trade in the 79.75-80 range against the dollar in the near-term.

“However, the RBI has shown a strong intent to defend the Rs. 80/dollar mark, in which case, a move above that level may not materialise,” Gupta adds.