The rupee fell to an all-time low of `52.73 to one dollar on Tuesday, before recovering to end at `52.29. This has caused great consternation, mainly among importers like oil companies and automobile manufacturers.
The rupee-dollar value affects the common man directly as it increases the prices of everything based on imports. It will be more expensive for people going abroad for studies or for tourism since their money will fetch fewer dollars. For those who depend on dollars sent from abroad, $10 would have fetched `444 on July 6. On November 22, the same $10 would have fetched `529. Much of India’s trade is done in dollars, and therefore its value is critical.
The value of the dollar is determined by supply and demand. This depends on several factors such as the state of the global and domestic economy, political conditions and psychology of share market traders and those who trade in currency.
Satish Kanthati, joint managing director of Zen Money, says “India runs on a trade deficit, i.e. we import more than what we export. Thus, there are more importers who will be victims of this phenomenon than exporters who are beneficiaries.” Also, he says, the key components that impact inflation are food and non-food elements, under which oil falls. Oil rates have a cascading effect. Since we import a lot of oil, we would end up losing out on a lot more.
“Besides this, companies that have taken loans from the US or Europe for lower interest rates would be affected as they would end up paying a lot more than they have borrowed,” he adds.
The current slide in the rupee is mainly contributed by global and domestic factors. On the global front, investors are buying the US currency because of the uncertainty surrounding the euro, the other major international currency. On domestic front, the foreign inflow of dollars has come down due to slow down in the economy.
According to Jagannadham Thunuguntla, strategist and research, SMC Global Securities Ltd, “The fall in rupee value will translate into an increased burden on Indian companies in repaying foreign loans.” The additional burden works out to be `27,000 crore.
The falling rupee value does not seem to worry the government and RBI excessively. They see it to be a result of the global investor climate. RBI expects the Indian currency to correct itself as the global situation, especially in Europe, improves.
“Going ahead, we believe that the persistence of global risks and weak domestic prospects will continue to keep the bias tilted towards a weaker Rupee in the near to medium term,” believes Upasna Bhardwaj, economist with ING Vysya Bank.