We all have heard that the Indian Rupee touched the 80 mark against the US Dollar. And this affects your finances. So, let’s discuss why the Rupee has fallen against the Dollar and how this affects your pocket.
Estimated read time: 3 minutes and 38 seconds
Hint: Understanding how currency value affects us directly is easy, but to know how it works is a golmaal.
Buckle up, here we go!
Let’s get something out of the way first.
The Indian Rupee’s value has fallen against the US Dollar but has gone up against the Euro, Pound, and Yen.
Yes, you read that right. The Rupee has lost about 7% against the US Dollar since January 2022. Yet, the Rupee has risen 4.97% against the Euro, 6.25% against the British pound, and 12.25% against the Japanese Yen until July 15 of this year.
Why has the Rupee fallen against US Dollars?
The fall is mainly because of high crude oil prices, a strong dollar overseas, and foreign capital outflows.
They all are connected to each other. Let’s see how.
The war between Russia and Ukraine has raised the price of crude oil and other raw materials. This has increased inflation across the globe. Inflation rates in the US have reached 9.1%, the highest in 40 years.
What does a country’s central bank do to reduce inflation? They increase interest rates. And the Federal Reserve of the US has increased their interest rates, and experts predict more interest rate hikes are on their way.
This increase in rate hikes has made many foreign investors withdraw their investments from India. Why? Because geopolitical situations have increased uncertainty over the Indian economy. Plus, because of the hike in interest rates, investment in India doesn’t make a good investment for investors.
So, foreign investors are taking their money out of India – meaning selling Rupee for US Dollars. And India’s high imports of crude oil have also increased the demand for the US Dollar and increased the supply of the Indian Rupee in the market.
There you go. We have explained why Rupee’s value is falling down against the US Dollar. We agree we have oversimplified it because there are some more factors in the market improving US Dollar’s strength, but that’s for another day.
How does a weak rupee impact you?
India mostly depends on imports for crude oil, metals, electronics, etc. India makes payments in US Dollars. If the Rupee is weak, it has to pay more for the same quantity.
A weakening rupee contributes to inflation.
India’s retail inflation is already around 7%, and if it increases more, you are going to get hit left and right. Sorry, buddy.
Prices of petrol, diesel, and cooking gas will rise. This will increase transport costs and affect your daily household items. Your favourite electronics that are mostly imported are going to get expensive.
If you have been planning a foreign trip or going abroad to study, mainly to the US, chances are you have to pay more.
How does a weak rupee impact your investments?
A weakening rupee has different effects on different investments. A diversified portfolio will provide you with a better security on a downfall.
Impact on equity investments:
You might have noticed that a few companies share prices fell because of the weak rupee against dollars, but some companies gain from this.
Companies that import products and services from other countries, mainly the US, will feel their profitability decline. Because they have to pay more rupees to buy the same volume of products or services.
Companies that export their products and services to other countries, mainly the US, will feel their profitability increase. Because they will receive more rupees for the same volume of products or services.
Do you have a well-balanced portfolio of export and import-related companies?
Impact on debt investments:
Just like the Federal Reserve of the US, India’s RBI has also increased interest rates to curb inflation. Usually, when the interest rate is hiked, debt instruments don’t perform well.
So returns on your debt mutual funds might be low.
Things are looking bad in the short term, but we don’t have control over these situations. So all we could do is give you a virtual hug and help you prepare your personal finance for these situations.
Wait, there is a silver lining –
Russia’s war, international trade disputes and geopolitical situations have brought a fresh change to India’s stance.
Remember, we told you that the Rupee has fallen against the US Dollar but risen against Euro, Pound and Yen.
India has a trade relationship with many countries, but we settle most of the transactions in US Dollars. And thanks to Russia, this is changing. India and Russia are conducting bilateral trade in Rupee-Ruble.
And last week, RBI announced domestic traders can settle their export and import transactions in Indian Rupee. This can reduce the dominance of the US Dollars and increase the demand for Indian Rupee.
But wait, not so fast. International trade is very complicated, and with politics added, you know how it goes? For now, we don’t know how this move will play out. Hope it goes in favour of India. Fingers Crossed.
Also, should you invest in international stocks to take advantage of rupee’s devaluation? Read here.
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