Rupee Hits a Record Low

On 15th August 2018, as the whole country rejoiced India’s 71st Independence Day, rupee celebrated by breaching the 70 mark against the US Dollar. The economic imbalance brought on by this event is clearly the talk of the day, if not the year. But what does this mean? Why exactly did it happen? And, how is it going to affect you? These are some of the many questions I would like to answer using layman terms in the following article.

$1 = ₹70.04, what does this mean?

Well, it simply means you need to shell out ₹70.04 to purchase a dollar, or someone having a dollar would get ₹70.04 in exchange for it.

Why does the value of Rupee keep changing?

The INR doesn’t have the same value it had, say, at the time of independence. It doesn’t have the same appearance either. The amount of foreign currency you get in exchange for the rupee is what decides its value. Of course, the higher the amount you receive in exchange, the greater the value of the currency you’re exchanging.

So, why does the value of rupee change? The answer is simple. The value of rupee depends on parameters like exports and imports, inflation, employment, how much you spend and on what, foreign exchange reserves, and a host of other issues.

Let me explain a few.

Exports and Imports:

When the value of the goods exported by a country is more than that imported by it, the local currency strengthens as more amount of foreign currency comes in. Logically, when the value of rupee falls, the exporters are benefitted the most as their income is usually in dollars and the equivalent amount in rupees (the local currency) would be higher.

On what you spend:

This is the most basic way in which the nature of the goods you buy affects the currency. If there’s an increase in the number of people earning, or there’s an increase in the amount people are earning, they tend to spend more. When you spend more on imported goods, the demand for the foreign currency increases, resulting in a weakening of the local currency.

Why did the value of rupee fall this time?

Forex experts seem to think the fall was a result of the crisis in Turkey; the Turkish Lira (currency of Turkey) depreciating to a record low against the dollar after the U.S. President announced that he’d be doubling steel and aluminum tariffs on Turkey, to be precise. (The U.S is trying to force the Turkish Government to release Evangelical Christian pastor Andrew Brunson, who is being held on terrorism charges.)

As you can see, geo-political factors and international politics also play a critical role in deciding the value of a currency.

The RBI intervened finally, and started selling U.S. Dollars to prevent a further plunge in rupee. (You might be thinking, “How does selling dollars affect the value of rupee?” To put it directly, when the RBI sells dollars, it receives rupees in return. This creates a demand for rupee.) To contain the free-fall this time, the RBI has spent about $23 billion from its foreign exchange reserves.

How does this affect you?

There are a lot of ways the fall in rupee might affect you. Imported goods, for example, are going to cost a lot more. Fuel prices may go up, since global price of oil is decided in terms of dollars and India imports about 80% of oil to meet its needs. This inflationary pressure may add to RBI’s woes and result in a further hike in key interest rates.

Additionally, overseas travel would become more expensive, discouraging education and holidays in foreign countries. Even the goods that use imported components such as computers, smartphones and cars would get highly-priced. Clearly, all import-based industries and trades would suffer.

But what most don’t realize is that a depreciating currency has certain positive repercussions as well. After all, export-based industries such as information technology and pharma companies do benefit from a weak rupee since most of their revenues come from foreign countries.

So, what now?

According to the Economic Affairs Secretary Subhash Chandra Garg, the latest fall was triggered by “external factors” and there’s no reason to worry as long as the depreciation is in line with other currencies. In fact, he went as far as claiming, “My sense is that there is stability now and this level of 66–67 should prevail for some time.”

However, the surging crude prices, consistent widening in the trade deficit as well as increased pressure from capital outflows paint a different picture – one of recurring instability and turmoil.

Clearly, the economic status quo of the country is as ambiguous as the ending of this article. - Siddharth Sampath