With the rupee recently weakening past ₹70 to a dollar and hovering about that level since concerns over the impact of the devaluation on economic indicators are intensifying. Here is what happens when the rupee falls:
Turkish currency turmoil: The Indian currency had plunged by Rs 1.08, or 1.57 percent, to a record low of 69.91 against the US currency amid fears that Turkish currency turmoil could turn out into global financial crisis.
The Spike in oil prices has pulled down the rupee, by pushing up dollar demand.
Global Trade war fears triggered by the US and China’s retaliatory import tariffs have also weakened the Rupee.
The Chinese yuan has fallen sharply in the last few sessions. This also has triggered a dollar flight from many emerging economies. The Spurt in dollar outflow has pulled down most Asian currencies, including the rupee.
How it affects inflation?
With rupee falling, the country’s imports become more expensive and exports cheaper. The reason is simple. It takes more rupees to pay for the same quantum of imports and fewer dollars for a buyer to pay for the same quantity of exports.
More expensive imports are likely to drive inflation upward, especially in India where input products constitute a large part of our imports. In addition, a depreciating rupee also impacts the oil import bill since it costs more rupees per barrel of oil, which plays its own part in pushing inflation up.
On the one hand, costlier inputs and the subsequent increase in the prices of finished goods should have a positive impact on GDP. But the consequent decrease in demand due to higher prices could nullify this.
A depreciating rupee certainly affects the exports and imports, since exports are likely to receive a boost while imports could flag somewhat. It remains to be seen what impact a reduction in household consumption would have on demand, especially when the festive season is nearing.
A depreciating rupee means higher prices of goods and services, costlier petrol and trips abroad turning more expensive. On the flip side, the domestic tourism could grow as more tourists visit India since their currency now buys more here. In the medium term, export-oriented industries may also create more jobs.