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As Rupee Slumps to Record Low of 71, Here's Why It's Falling Like Never Before

The rupee has significantly slid in its value over the last few months. The value of the rupee against the dollar has fallen by more than 6 percent since the beginning of 2018, and the fall has gained further momentum in the last few days, hitting life-time lows.


Updated:August 31, 2018, 1:15 PM IST
As Rupee Slumps to Record Low of 71, Here's Why It's Falling Like Never Before
Illustration by Mir Suhail/News18.

New Delhi: The rupee slumped to a record low of 71 against the dollar on Friday by falling 26 paise on persistent demand for the US currency amid rising crude prices.

At the Interbank Foreign Exchange (Forex) market, the local currency opened lower at 70.95 a dollar and slipped further to hit its lifetime low of 71 from its previous close of 70.74. The fall and rise of a currency is closely linked to a number of factors like inflation, monetary policy, interest rates among others.

Exchange rates are constantly fluctuating, but what, exactly, causes a currency's value to rise and fall? Simply put, currencies fluctuate based on supply and demand.

Most of the world's currencies are bought and sold based on flexible exchange rates, meaning their prices fluctuate based on the supply and demand in the foreign exchange market. A high demand for a currency or a shortage in its supply will cause an increase in price. A currency's supply and demand are tied to a number of intertwined factors, including the country's monetary policy, the rate of inflation, and political and economic conditions.

The rupee has significantly slid in its value over the last few months. The value of the rupee against the dollar has fallen by more than 6 percent since the beginning of 2018, and the fall has gained further momentum in the last few days, hitting life-time lows.

One of the primary reasons linked to the fall is the U.S. Federal Reserve being expected to tighten its monetary policy stance further in the coming months by taking steps towards slowing down the growth in U.S. money supply. A slowdown in U.S. money supply growth affects the value of rupee in two ways. Firstly, interest rates in the U.S. will begin to rise as the Fed’s demand for various assets begins to drop. This causes a rush among investors to sell their assets in other parts of the world and invest the money in the U.S., where they could earn higher returns.

The consequent flow of capital from the emerging markets to the U.S. increases selling pressure on emerging market currencies and buying pressure on the dollar. Secondly, as the Fed begins to tighten money supply, the availability of dollars in the global market is likely to turn scarce, compared to other currencies. Both these factors affect the price at which traders, who try to speculate on future retail demand, are willing to buy the dollar using other currencies.

The weakening rupee will make crude oil, fertilisers, medicines and iron ore, which India imports in large quantities, costlier. Though these items are not for your daily consumption, they impact your finances indirectly.

For example, since India imports roughly 70 percent of crude oil it consumes, a weak rupee will influence petrol and diesel prices. The already high prices may further rise.

Crude palm oil is also one of the largest imported commodities by India. This decides prices of other edible oils. Therefore any rise in crude palm oil prices will raise retail prices of edible oils as well.

FMCG, or fast moving consumer goods, such as soaps, detergents, deodorants and shampoos, of which crude oil is an input, are likely to become more expensive.

Pulses and oil, which account for a large part of India’s imports, will also be affected.

Students who have taken loans to fund their foreign degrees will also bear the brunt. Education loans are usually in rupees, but as students pay their expenses in a foreign currency, the cost of education and stay will increase.

Jobs may most likely be paying less as well. For industries dependent on heavy amount of imports will have to face a higher cost of operation. This may in turn reflect with shrinking pay cheques for employees.

The falling rupee is bad news for Indians off to vacations to a foreign country. Air fares may go up due to an increase in fuel surcharge. The stay will be getting costlier as well. Also, shopping will burn a hole in the pocket.

The depreciation of rupee will impact the automobile sector in three ways. First, input costs will rise, as these companies use imported components. Second, some companies will have to pay higher royalty to foreign parent firms. Third, many have foreign currency loans in the form of external commercial borrowings and foreign currency convertible bonds. Therefore, more or less all auto companies will have to increase prices.

The imported paperback, your favourite pizza and the latest laptop will also become more expensive.

Electronic consumer goods such as computers, televisions, mobile phones, etc, with imported components will also become costlier. International food chains which run outlets in India are not denying the impact on profitability.

| Edited by: Ahona Sengupta
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