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Aug 07, 2013, 08.06 PM IST | Source: Moneycontrol.com

How depreciating rupee impacts middle class Indians

Vivek Sharma simplifies the impact of the fall of rupee on a middle class Indian. He explains on how day-to-day life will take a hit in a significant way.

Vivek Sharma

Rupee continues to tumble against dollar. On Tuesday, it touched all time low against the dollar. Inspite of a series of stringent measures taken by RBI, the fall of Indian currency continues unabated against mighty dollar.

Also read: Steps RBI, government can take to stabilise rupee

While traditional thought about impact of fall of rupee has been confined to external front of the economy i.e. exports and imports; now in the globalised scenario, the falling rupee impacts our day-to-day life in a significant way.

The falling rupee potentially can hit our pockets directly and make management of our day-to-day expenses challenging.  In order to understand this, let us look at how rupee impacts our savings and has the potential to derail financial planning:

Depreciating rupee can cause loan rates to go up 

The Reserve Bank of India (RBI) has left no stone unturned to control fall of rupee against dollar. The measures taken have been very harsh ranging from limiting access to liquidity adjustment facility, to increasing rates on marginal standing facility to higher average maintenance of cash reserve ratio (CRR).
Banks have been made to feel the pinch of shortage of liquidity.

The 10 year G-SEC yield has gone up to as high as 8.5 percent. Left with very limited options now, if rupee continues to slide due to a combination of internal and external conditions, RBI will have no option but to raise repo rate.

Raising repo rate will tantamount to pressing panic button. If repo rate goes up, banks will not hesitate to pass it on the customers unlike what they do when rates fall. The situation seems to have just reversed from what it used to be three months back when everybody was expecting interest rates to fall. This transition is purely because of fall in the value of rupee.

Rise in inflation

Depreciating rupee increases the cost of imports which has a direct bearing on the inflation. Basically import of goods becomes costlier whenever rupee depreciates and no wonder it makes impact on our day to day life as we are consumer of imported products.

We have already felt the pinch of it as petrol and crude prices have been increased in past few months. But the worst is yet to come. Cost of crude import is bound to go up with the fall in value of Indian currency.

Every fall in rupee is an invitation to inflation, unless managed well by the regulator. Increased inflation means more expenses which in turn has potential to impact the financial planning process.

Increase in the cost of education  

Increasing cost of education is not just going to impact those who go out of India to acquire post graduation qualification or specialized education, but also to those Indians who want to be in India and acquire higher education.

Today many students in India write examinations like CFA, CPA, CAIA, ACAMS etc. to acquire educational qualifications. Many certifications in information technology are also acquired through distance learning and online mode in India which requires payment of money in dollar terms.  So the falling rupee may hurt plans of many India based students who wish to acquire international qualifications based in India.

Slowdown and job loss

Falling rupee is a recipe for slowdown in economic growth. If the fall of rupee continues, the foreign investment will dry in India thereby creating a gap between investment required for growth and the actual investment made. This may not happen in immediate future, but this cannot be ruled out altogether.

Consistent fall in rupee may also take hot money i.e. FII out of India. While the domestic investment in slowing down at a fast pace, slowdown of foreign investment at this juncture will strongly impact economic growth. Slowdown does not just impact the creation of jobs it also has potential to create job losses.

The most worrying aspect of fall of rupee is that it has been purely caused by fundamental factors and hence curbing of speculative activities alone cannot arrest depreciation of rupee. High inflation and high rate of inflation have caused rupee to reach this stage.

The demand for dollar has been strong because of higher imports as well. The middle class Indians need to be ready to face the music if positive policy measures are not initiated by the government in India.

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