The value of the Indian rupee or any other currency, is determined by the demand for it. When demand for a currency rises, so does its value (it is termed “appreciation”). As more international investors make investments in India, the demand for Indian currency rises. While overseas investors and corporations can only invest in rupees in Indian marketplaces, they must first convert their money into rupees before investing or purchasing things from India. As a result, demand for the Indian rupee rises, and its value rises against the US dollar and other currencies.
When Indian people and businesses import goods (such as crude oil, gold, and so on), they must pay in dollars (the de facto global currency). As a result, Indians exchange rupees to purchase dollars since the US dollar is the currency used to pay for international trade. As a result, demand for the dollar grows, and the rupee falls against the US currency.
The Dollar Market:
The US Dollar has become the world’s reserve currency. The Euro and US dollar are both widely used and recognized in international marketplaces. The US Dollar contributes to more than 64% of foreign currency in international banks. It is around 20 percent for the euro currency. The value of the US dollar reflects the strength of the American economy.
The US dollar accounts for 85 percent of global trade, including crude oil. Around 40 percent of worldwide loans are sanctioned in dollars. The other 180-odd currencies on the globe, on the other hand, are used within their own nations.
Since India is a net importer (we import more than we export), the rupee has devalued significantly over time. The slow fall of the Indian rupee is never a cause for alarm. However, if the rupee’s decline is rapid, this is a cause for concern. From that perspective, the rupee’s drop of more than 3.2 percent in a month is worrying. And there are two key causes of the rupee’s decline.
Overseas Investors Are Leaving Indian Markets:
Foreign investors are leaving their assets in India amid the US Fed’s announcement to raise interest rates in the US and the Russia Ukraine war. When foreign investors redeem their assets in India, they receive their money in rupees. However, they must convert their holdings (in rupees) to dollars. As a result, they will trade dollars for rupees. And demand for the dollar rises while the rupee falls. As a result, the value of the Indian rupee falls in relation to the US dollar.
Increased Dollar Buying As Oil Prices Rise:
India is a net crude oil importer. Since the beginning of 2022, worldwide oil prices have increased by more than 60%, forcing Indian corporations to spend more money. It implies higher demand for dollars and, as a result, a weaker rupee. Now that we know why the rupee has dropped to an all-time low, let’s look at how it can affect your money.
The Impact Of Rupee Devalue On The Finances:
A dramatic drop in the rupee is likely to have a significant impact on a person’s money in four ways. Let us analyze the reasons in depth.
The Price Level May Rise
As previously said, when Indian enterprises import things, they must purchase dollars to fulfil their payment. Importing crude oil will become more expensive if the rupee falls against the dollar. Similarly, imported items from India, such as electrical machinery, mechanical appliances, precious metals (such as gold), and so on, would become more expensive.
As a result, the byproducts of these imported resources are likely to be more expensive. Companies may be unable to absorb this expense rise and may pass it on to customers. As a result, general inflation in India may grow quicker than expected.
Possible Interest Rate Increase Higher FD And Loan Rates
A reasonable degree of inflation is helpful in a healthy economy since it does not hurt consumers and supports economic activity. A rapid increase in inflation, on the other hand, is never good for the economy. In India, the government has charged the Reserve Bank of India with keeping inflation under control.
If the RBI anticipates that inflation will exceed its tolerance level for any reason, it will raise the repo rate to combat inflation. When the Reserve Bank of India boosts interest rates in the economy, the cost of borrowing for banks rises as well.
As a result, banks pass it on to their account holders by raising loan and deposit interest rates. The interest rate has not recently been raised because the RBI is keeping inflation under control to boost growth. However, central banks throughout the world aim to raise interest rates in their respective countries. If inflation in India stays high, we may see some rate rises shortly.
Your Investment Portfolio Could Fall
As foreign investors withdraw from Indian stocks, the rupee falls in value. The exodus of foreign investors has resulted in a dramatic drop in equity markets. As a result, your stock and equity mutual fund assets are likely to suffer a drop.
Not just stocks, but your returns on debt funds may also fall. Because if the currency reduction causes a rapid rise in inflation, the RBI will raise interest rates. Furthermore, debt funds perform badly in rising interest rate circumstances.
Foreign Travel And Education Will Become More Expensive
One of the most visible consequences of the rupee’s devalue is that overseas travel and school fees are expected to climb. As previously said, as the rupee falls in value, you will have to provide more rupees for each dollar. As a result, your costs will certainly rise.
While a significant rupee decline is bad for a person’s money, there are a few ways to profit from it. For example, one may use the rupees devalue to their advantage by investing in international funds. Investing in international funds exposes to foreign currency through investing in rupees. Returns will be boosted by any gain in the value of the foreign currency or any decrease in the value of the rupee.
Another option for dealing with rupee depreciation is to diversify one’s portfolio into firms with significant foreign exchange revenues. Companies in the IT, FMCG, and pharma industries, for example, as their products get cheaper elsewhere and margins remain intact, such firms are more likely to claim stronger sales and profit increases. As a result, these enterprises have a greater chance of surviving a drop in the rupee.
To summarize, the approach to dealing with events such as a severe rupee devaluation is to establish a diverse portfolio. And, to preserve personal funds, rebalance the portfolio on a regular basis.
Hence this has a major impact on the global economy and we have a complete blog related to the world economic crises due to the Russia-Ukraine War. To grasp the knowledge about the concept visit our previous blog to know more about it.