The Indian rupee fell to its lowest level in over 16 months closing at 67.8750 per dollar on Wednesday, 16th May. It closed at 68.57 at the time of writing this article (12th July 2018) just a smidgen above the lowest value. It is the worst performing Asian currency and has fallen by over 5% to the dollar since the beginning of 2018. It is thought that the RBI has intervened to lend some support to the currency, as some state-owned banks were selling dollars intensively.
What does a ‘weak’ currency mean?
Essentially, a weak rupee means that the Indian rupee exchanges for lesser amounts of a foreign currency. Simply put, 1 USD has the capacity to buy INR 68.75 of goods. The fall in the value of the rupee means that buyers have to give away more rupees to buy dollars. – good news for exporters in other countries, but bad news for Indian importers.
“The fall in Indian rupee can be attributed to higher crude oil prices, widening trade deficit, and higher capital outflows,” Prathamesh Mallya, an analyst at Angel Commodities Broking, said in a report on April 17 (https://qz.com/1255215/the-indian-rupee-is-at-a-seven-month-low-here-are-three-reasons-why/ ).
Nearly 80% of India’s fuel needs are met by crude oil imports. The demand for crude oil has increased and with it, the cost. The rise in prices coupled with the weaker rupee has spiked the import bill in addition to a decrease in exports has widened the country’s trade deficit.
However, the ex-Chief Economic Advisor, Arvind Subramanium, from the data in the Economic Survey of 2018 stated that the economy is doing better than expected and that there is a prediction of 7 – 7.5% of an upturn. He has stated that exports are on the rise so there could be a change later on.
Finally, Foreign Investment could possibly offset the negative impact of the weakening local tender as it could be an opening for additional dollars to come in, however, over January, February and March, Foreign Portfolio Investment has reduced dramatically – the number now stands at “Rs.13,260 crore, a fifth of the figure at the same time last year” (https://qz.com/1255215/the-indian-rupee-is-at-a-seven-month-low-here-are-three-reasons-why/ ).
Yikes, does anyone benefit from this?
In this situation, there are people who benefit from this. The export industry, which as stated above is anticipated to grow, stands to gain from this as for each dollar they earn, they earn more in rupees. Profits of the NIFTY 50 companies (the stock market showing the weighted average of the 50 Indian company stocks) could be on the rise as more than half of the companies do not earn in rupees. IT and auto-component companies stand to gain from this. On the flip side, Fast Moving Consumer Good companies (processed food, beverages etc) and Telecom could suffer (https://www.bloombergquint.com/markets/2018/07/12/what-happens-when-70-becomes-the-new-60-for-rupee).
By extension, those gaining jobs in the export industry also seem to have an advantage now. The domestic tourism industry also profits from this as from a foreign tourist’s point of view, India seems an attractive option for a getaway at a low price.