Rupee Vs Dollar: Like other markets, the money market too works on the basis of demand and supply; thereby, if the demand for the dollar gets high, the rupee depreciates and that is the basic working methodology of the floating exchange rate.
The Rupee has been staggering since the beginning of the year i.e fall in the purchasing power of rupee has been unreal. The value of $1 USD was Rs. 63.5 Which now is nearly Rs. 77and there are estimations that it will soon hit the Rs. 80 mark!
That's around 20% depreciation in Rupee. Now you must be wondering if I need to worry about it if there is no foreign trip planned? Well, yes the rupee depreciation will not only affect your overseas expenses but also affect financial markets in India, interest rates on loans and even the overall Indian economy. So in this article we have covered everything about why the rupee is falling and what are its consequences.
Why has the rupee been falling drastically?
Decrease in the demand of rupee.
Fundamental reason behind the fall or rise of any currency is demand. If demand for currency increases its value also increases. So if India exports goods and services and foreign investors invest in India the value of rupee goes up which has not been happening and thus the rupee is hitting all the down records.
Foreign investors are exiting.
Foreign investors have already pulled out over $21.3 bn (Rs 1.62 lakh crore) and the reasons are the Russia/Ukraine war as well as the increase in the repo rates and interest rates by reserve bank of India.
Problems with Global Supply Chain
There are multiple reasons that cause the depreciation of the INR which can range from inflation, global economy, rising global fuel prices, global geo-political scenarios and more.
Imports now more expensive, while exports are cheaper
With a small dip in the Indian currency, the Indian government has to pay a little extra for the same goods it was importing earlier. So, importing items get more expensive.
Oil imports will get costlier, which has a direct impact on prices of many other things – anything that needs to be transported will (if it hasn’t, already) now see an increase in its prices.India currently imports 85% of its oil demand and the rise in crude oil prices directly increases import bill and expenses.
How it can affect your Personal Finances?
Inflation may go up.
When we talk about finance and economy it's all interrelated. As discussed, India imports crude oil which weakens the rupee and also makes it expensive to buy crude oil.It will also import other products and also finished products like edible oil, petrol, electricity will be more expensive. All these factors will lead to inflation which every common man has to face.
Effect on interest rates.
The Reserve Bank of India controls inflation and implies regulations to control it. If the inflation increases because of rupee depreciation beyond the limit, the Reserve Bank of India. RBI can take various steps like increasing repo rates and bank rates to control the inflation. This results in high interest rates on loan and high fd rates by commercial banks.
This indirectly affects the common man because of high interest rates on loans.
Fall in overall returns on your portfolio.
Depreciation in currency indirectly affects the financial markets and causes fall in financial markets. When the value of rupee depreciates it results in a lower index in Indian stock exchanges. Overall returns of investors in stock market,bond market and mutual funds often see the downfall in such conditions.
Increase in overseas education and trips.
Due to depreciation in rupee Indians have to pay a little extra may it be education in ivy league college or your dream vacation. Because of the decrease in the value of the rupee , the exchange value of the dollar increases and thus it directly affects your personal finance.
How to maintain your portfolio?
Invest in Gold
Investors in India and around the world consider investing in the gold safe during the recession. When the world is suffering from an economic crisis due to the coronavirus pandemic, there is a hike in gold prices. This is due to the demand and supply factor. It must be noted that whenever there is recession or slowdown or depression in the economy, gold prices hike as they are considered to be the safest mode of investment by the investors.
Rebalance Stocks
A good investment strategy during a recession is to look for companies that are maintaining strong balance sheets or steady business models despite the economic headwinds. Some examples of these types of companies include utilities, basic consumer goods conglomerates, and defense stocks. In anticipation of weakening economic conditions, investors often add exposure to these groups in their portfolios.
Increase Cash Reserve
Save Money. Putting away money during difficult times can be challenging, however, even putting a small amount of money away can help. Experts recommend having money for three months of basic expenses, like rent or food.
Build an Emergency Fund
Try to build a corpus that can help you sustain your monthly petty expenses along with EMIs for at least six months. Having six months’ worth of expenses can seem like a daunting task, but one can achieve this goal by small contributions.
Buy a Real Estate
Don't buy a house. At least right now, During a recession, there are usually less buyers, so houses stay on the market longer. This makes sellers more likely to lower their listing prices, so that their home is easier to sell. You might even get lucky with a home at an auction. More
That was everything you needed to know about why the rupee is weakening, how it affects your personal finance and how you can make your way through it.
Do tell us about your views on the current economy and your analysis on why the rupee is falling in the comment section.
Comments