On Monday, the Indian rupee hit an all-time low against the US dollar, as US monetary policy strengthening roiled markets and foreign investors continued to flee Indian stocks.
The rupee has been battered by rising oil prices and a strengthening US currency, with the Reserve Bank of India’s (RBI) unexpected rate hike last week doing little to prevent capital outflows.
The rupee plummeted to 77.56 versus the US dollar on Monday, breaking the previous record low of 76.98 set in March.
The drop occurred as Indian equities on the benchmark Sensex and Nifty50 indices lost ground for a fourth day on Monday, falling more than 1% apiece before rebounding later in the day.
Banks, metals, and oil and gas companies all fell the most, with market heavyweight Reliance Industries falling more than 3.0% after its quarterly results were released late Friday.
According to stock exchange data, foreign investors have pulled a net 1.34 trillion rupees ($17.3 billion) from Indian equities so far this year.
As foreign funds become risk-averse, the turmoil in Ukraine and the revival of Covid-19 restrictions in China have worsened outflows from emerging economies like India.
Concerns about inflation, fueled by rising commodity costs, have dampened morale in Asia’s third-largest economy, which imports more than 80% of its oil.
In March, India’s consumer price inflation touched a 17-month high of 6.95 percent year-on-year, and economists predict data later this week to show that rate going above 7% in April.
The US Federal Reserve raised key lending rates by half a percentage point last week, but refrained from announcing additional extreme steps.
“After an unscheduled rate hike by the Reserve Bank of India, if India’s inflation moves higher than 7.0 percent… the pressure will be on for the RBI to act again,” forex firm OANDA’s Jeffrey Halley said in a note.
“That may give some strength to the rupee but is unlikely to be bullish for local equities.”
This is How it will impact your life:
The weakening rupee will almost certainly affect your spending.
Imports: To pay for imported goods, importers must purchase dollars. Importing things will become more expensive as the rupee falls in value. Imports of oil will become more expensive, affecting consumers directly.
Additionally, other imported commodities as well as components are anticipated to become more expensive, raising consumer prices. As a result, automobiles and appliances are likely to become more expensive.
Inflation may be accelerated by rising prices, which is already high.
Loan Rates & EMI’s: There will almost certainly be an indirect effect on loans. Import prices rise when the rupee depreciates, making articles and commodities more expensive. Inflation is pushed. With growing inflation, the RBI is now considering changing the repo rate, which has already been raised by 40 basis points to 4.40 percent. High repo rates cause banks to raise lending rates, making EMIs more expensive. Bank loan rates have already been raised.
Inflation and repo rates follow the same path. To keep inflation under control, interest rates are raised. High interest rates will make borrowing more expensive, preventing consumers and businesses from making large-ticket purchases. In other words, it will restrict the amount of money available for the purchase of riskier assets. The wealth impact is reversed when the repo rate is high, and banks become more cautious about lending.
Luxury cars & electronics: Imported commodities such as luxury cars and even car components are likely to become more expensive as the rupee depreciates. This indicates that the price of such things will eventually rise.
Furthermore, things such as phones and appliances that require imported components are likely to become more expensive.
Stock Markets: Foreign investors’ withdrawal from Indian equities has also resulted in rupee devaluation. This suggests that equity markets may experience a significant drop, resulting in a drop in stock and equity mutual fund investments.
Foreign education & travel: Foreign schooling would become more expensive as the rupee loses value against the US dollar. This is because, as the rupee depreciates, one will have to provide more rupees for each dollar. As a result, international students and those seeking to go overseas will need to adjust their budget. Furthermore, with summer vacations approaching, now is the season for international travel. Also, travellers expected to finally be able to go abroad with their COVID-19 cases. As a result, consumers who were expecting and planning vacations overseas will have to spend more money as a result of this news.
Remittances: Non-resident Indians (NRIs) who transfer money home, on the other hand, will send more money in Rupee worth.
RBI intervention: To bring volatility under control, the central bank can release Dollars. However, for the first time in a year, the FX reserve has slipped below $600 billion. Forex reserves have been drained by $36 billion by 2022. It will be interesting to watch how the RBI handles these data.