Rupee fall: How does the depreciation in rupee impact you?

The Indian Rupee weakened to a 20-month low on Wednesday before showing some signs of recovery in forenoon trade on Thursday. On Wednesday, the Indian Rupee had fallen to 76.32, a level not seen since April 24, 2020.

Why is the Rupee plummeting?

Moneycontrol recently published a story where experts argued that the currency’s weakness is emerging from multiple factors including concerns on account of rising Omicron cases, widening current account deficit, capital outflows and a strengthening dollar.

Outflow of capital from emerging markets amid concerns over the spread of the Omicron variant is contributing to the currency’s fall even as the RBI has built up strong foreign exchange reserves. The central bank has added over $60 billion in forex reserves in FY22 so far.

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Moreover, there was broad weakness across Asian markets ahead of the US Fed's meeting, as investors expected an accelerated pace of liquidity tightening. The Fed announced it would double the pace at which it is scaling back purchases of Treasuries and mortgage-backed securities to $30 billion a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.

“A tapering by US Fed will lead to an outflow of fund flows from emerging markets. Inflation in the US has risen to a multi-decade high, posing a risk for the Fed to act sooner than expected,” Nish Bhatt, Founder & CEO, Millwood Kane International said.

The RBI often intervenes in the forex market to arrest the steep fall of the currency, but the central bank’s response loses efficiency beyond a point when global factors dominate.

Impact of falling Rupee on Indian economy

The primary and immediate impact of a depreciating Rupee is on the importers who are hit hard when their Rupee cost per Dollar goes up commensurately.

However, it is a boon for the exporters as they receive more rupee in exchange for dollars.

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Thus, overall expert competitiveness improves in an economy, but importers need to shell out more per dollar to make their payments.

With respect to the macro economy, costly imports have a cascading effect on local prices, which rise subsequently. The depreciating Rupee can cause a further spike in domestic fuel prices, which would in turn push up prices of other essential items as transportation costs rise.

A falling Rupee could also hurt those looking for overseas education as their costs swell accordingly. Similarly, it is negative for those who have plans to travel abroad. A sharply depreciating home currency means overseas travelers have to rework their budget as the Rupee loses value against the dollar.