From price hikes to higher remittances: How the rupee's historic new low will impact Indians

The Reserve Bank of India says that inflation may be peaking



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A Staff Reporter

Published: Tue 19 Jul 2022, 12:42 PM

Last updated: Tue 19 Jul 2022, 10:32 PM

With the Indian rupee having breached the 80-mark (to the US dollar), a lot of people are wondering what would be the impact on their daily lives and on the country’s economy.

We take a look at the wider impact that the sharp depreciation of the rupee against the American currency will have on the lives of millions of citizens in India.

How will it impact an ordinary person?

The rupee depreciation against the US dollar will make a lot of imported items dearer. Crude oil is the most important commodity, which would see petrol and diesel prices soar, hurting not just motorists, but also those using two-wheelers, taxis and public transport.

Similarly, the cost of importing coal, fertilisers, vegetable oils, gold, precious metals, iron and steel and electronic goods will go up sharply, making these products more expensive for the public.

The spurt in the price of these products would trigger off inflation. The Consumer Price Index (CPI) has been above six per cent, which is above the upper limit of the Reserve Bank of India’s ‘comfort zone’ for more than six months, and will surely accelerate further. In May it had shot up to 7.79 per cent, but cooled down at the end of the summer season, touching 7.01 per cent in June and 7.04 per cent in July.

The fuel and energy basket account for nearly seven per cent in the CPI, while oil and fats (edible oil) make up more than 3.5 per cent.

But India’s central bank is hoping for a change for the better. "A sliver of hope has become visible in the recent moderation in global commodity prices, and especially food prices,” it said in a report. “This suggests that unjust inflation may be peaking, providing a breather for beleaguered nations across the world.”

The revival of the monsoon, the acceleration in the manufacturing sector, possibility of a good performance in the agriculture sector, adequate stock of foodgrains and good international reserves are factors that the central bank is highlighting.

Will the rupee continue to plunge against the US dollar, making imports prohibitively expensive?

This is the big question worrying ordinary citizens and government leaders. The massive, nearly $30 billion outflow of foreign exchange from India in 2022 has plummeted the Indian currency, which fell to an all-time low of 80.06 to the US dollar on Tuesday.

It has declined by seven per cent this year and many analysts forecast that it will fall further over the coming months. The government acknowledged that the rupee has fallen by more than 25 per cent over the last eight years: from Rs63.33 to a dollar in 2014 (when the BJP-led government came to power) to Rs80 now.

The RBI, however, has not reacted sharply to the declining value of the rupee. It intervenes only when there is a sharp fall, helping the currency to stabilise, selling dollars in the market.

Which segment of the population will be the worst-hit by the fall in the value of the rupee?

With the gradual relaxation in global travel, among the most affected are Indians, venturing out on holidays abroad. The cost of the dollar has risen sharply and holidaymakers will have to spend a lot more while abroad.

Summer is also the time when tens of thousands of Indian students head abroad to the US, the UK and other countries in pursuit of higher education. The cost of their education and living abroad will consequently be dearer than in the past.

And who are the major beneficiaries in the sharp decline of the rupee?

NRIs living in the Gulf, the US and North America, the UK and Europe, in Southeast Asia and Australia-New Zealand, who remit billions of dollars home every year will gain significantly with the fall in the value of the Indian currency.

Indians living abroad will be keen on repatriating funds and investing in properties, stock markets, bank deposits and also look at other opportunities.

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What has been the government’s reaction to encourage NRI investments into the country?

The Indian government and the central bank have taken several steps to encourage the flow of foreign exchange from overseas Indians. These include exemption of incremental Foreign Currency Non-Resident (Bank) and Non-Resident (External) rupee (NRE) deposits from the maintenance of CRR and SLR up to November 4, 2022; exemption of fresh FCNR(B) and NRE deposits from the extant regulation on interest rates to allow banks to provide higher interest rates till October 31, 2022 than those offered to comparable domestic rupee term deposits to attract foreign currency deposits.

It has also revised the regulatory regime relating to Foreign Portfolio Investment in debt flows to encourage foreign investment in Indian debt instruments and raising of External Commercial Borrowing limit (under automatic route) to $1.5 billion and the all-in-cost ceiling by 100 bps in select cases up to December 31, 2022.

Will Indian exporters of products and services also gain significantly?

The depreciating rupee will provide the much-needed boost to India’s export earners, making Indian products competitive. And with China still battling the Covid-19 crisis, many in the Indian export segment believe that global opportunities are enormous now.


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