June 30, 2013

How can weakening rupee impact Economy and People

The rupee is not only the worst performing currency in Asia, its the second worst performing currency in the emerging markets. Here are 10 ways how a weak rupee impacts you:
Weakening Rupee and Its Impact
  1. Morale dampener to people in India: Except NRIs, who stand to gain the most on account of the rupee weakness, most Indians are worried because of the rapid decline in the rupee.
  2. Higher EMIs: Central banks around the world resort to higher rates to stem depreciation in the currency. That's because higher interest rates could bring in higher capital inflows necessary to finance current account deficit. That means living with high equated monthly installments.
  3. Stuttering growth: India's GDP grew by 5 per cent in 2012-13, the slowest in a decade. The sharp depreciation in the currency and the RBI's likely tight monetary policy will lower growth expectations. 
  4. Slowdown in foreign investment: Weak growth prospects will lead to a slowdown in capital inflows hurting investment in Indian economy and more so in the crucial infrastructure sector.
  5. Rising inflation: Global commodities have 35 per cent weightage in India's wholesale inflation basket, and as the rupee weakness, the prices of these commodities go up. Nomura estimates that a 10 per cent depreciation in the rupee adds 60-80 basis points to headline inflation.
  6. Higher fuel price: Petrol prices have been hiked twice this month. Such hikes will become a recurring feature as rupee weakens further. Crude, which is priced in dollars, is India's biggest import item and a depreciating rupee increases the cost of imports. The worst part is Indians will have to pay more for fuel even though global prices have hit a year-low.
  7. Greater volatility in stocks: Foreign funds have sold net $6.7 billion (largely from bonds) from May 22 to June 24, 2013, Nomura says. The BSE Sensex has fallen nearly 8 per cent over the same period. Foreign funds are likely to sell more because the weakness in the rupee makes their investment unattractive. Shares in companies with higher FII holdings will be under pressure.
  8. Corporate profits: Exporters will gain, but companies dependent on imported raw materials will see a sharp impact on their bottom line. A weak rupee also exposes companies with unhedged overseas loans.
  9. Costlier foreign education: Those planning to go to the U.S. will have to shell out at least Rs. 2-4 lakh more for their expenses because of the sharp fall in the rupee, according to industry body Assocham estimates.
  10. Costlier foreign travel: Travelling abroad will be costlier as you will have to pay more rupees to buy dollars for your overseas trip/vacation.


No comments: