Rupee Falls To All-Time Low vs Dollar: How It Will Impact Indian Economy

The rupee slumped 76 paise to close at 76.93 on Monday, after touching its lifetime low of 77 against the US dollar on Monday as the dollar spiked along with crude oil in view of the Russia-Ukraine crisis. 

The rupee has seen a decline of 17.5 per cent in the last five years -- it was 65.47 in 2017 and it was slipped to 76.96 on March 7, 2022.

Global oil prices soared past $120 per barrel amid the US and European nations mulling a ban on Russian energy imports.

Sustained foreign fund outflows and a lackluster trend in domestic equities also weighed on investor sentiment, forex traders said.

Foreign institutional investors remained net sellers in the capital market on Friday as they offloaded shares worth Rs 7,631.02 crore, according to stock exchange data.

This spells trouble for the government as rupee depreciation is a double-edged sword -- the exporters will gain but it will pinch the importers who make transactions in dollars.

India imports nearly three-fourths of its oil, making it one of the most vulnerable in Asia to higher prices. The prices of oil will inflate the import bill and in turn the trade deficit.

The ongoing depreciation of the rupee is also set to make borrowings in foreign currency expensive for corporate India.

While a weaker currency may support exports amid a nascent economic recovery from the pandemic. It poses the risk of imported inflation and may make it difficult for the central bank to maintain interest rates at a record low for longer.

India's trade deficit in February widened to $21.19 billion, the commerce ministry data showed.

The merchandise exports in February rose 22 per cent to $33.81 billion against $27.63 billion in the same month last year. Meanwhile, imports in February 2022 were $55.01 billion, an increase of nearly 35 per cent over Rs 40.75 billion in February 2021.

Meanwhile, the country's external debt rose to $593.1 billion in September 2021, from $ 556.8 billion a year earlier. India's external debt is held in multiple currencies, the largest of which is the United States dollar. 

Here is the impact of rupee depreciation:

Inflation:

As the rupee depreciates, the crude oil import bill will rise, which, in turn, will lead to a rise in both petrol and diesel prices. the transportation cost and indirectly lead to rise in the price of goods. Thus, inflation is likely to go up.

Foreign education to get expensive:

Students going abroad to study will have to revisit the budget as it is going to get costlier because of lower currency value.

Better payment for exports:

Exporters will receive a higher amount on converting foreign currency payments in Indian rupees. IT and Pharma companies' earnings will get a boost on the falling rupee. 

More money for inward remittances:

Non-resident Indians (NRIs) who send money back home will see a jump in value when the foreign currency is converted into rupee terms. NRIs who invest in India will see their returns going up.

Import:

Importers will lose with a sharp decline in the rupee as they will have to pay extra as the value of the rupee declines. 

Why foreign currency borrowing is risky:

If the loan is in dollars, and the rupee weakens, in addition to the interest rate, the borrower needs to pay back more if the rupee weakens. 

For this reason, borrowing in domestic currency is expected to be safer than borrowing in foreign currency.

On the other hand, in the case of exports, even when an exporter borrows in dollars, he is not putting the balance sheet at risk. 

If the government borrows from international markets, it will have currency risk as rupee depreciation will shoot up the interest.

India Inc has so far this year raised over $6 billion through offshore bond issuance, aided by surplus liquidity, low-interest rates, etc.

With mounting geopolitical concerns, a foreign currency loan would be a blow to the corporates as they will have to shell out more money to repay their debt.