These days Business TV channels and newspapers are full of economic terms like Rupee depreciation or Falling rupee, fiscal deficit, Current account deficit, Inflation, RBI Monetary policy etc. These jargons are no doubt economic in nature and related to country’s overall economic conditions but all these have impact on our personal finances too. These are not just data but an indication of country’s standing in the eyes of external world due to internal issues and management.Indian investors who’s invested in stock market knows only that fall in rupee leads to fall in equity market and thus their returns, and those who are out of equity are feeling proud of their decision. But is the falling rupee affecting stock markets only? NO. This will affect every one of us. Our personal finance budget, income, investments, Loan EMIs etc. all has interrelation with all economic indicators. In investments, none of the asset class be it equity, debt, gold or real estate has generated positive return in last 1 month. Of course when country’s economic situation is in doldrums how can you expect any investment to grow. This article is about potential reasons an effect of rupee depreciation on our personal finances.
What is Rupee depreciation?
When you need more rupees to buy other currency this means that rupee is getting devalued. For e.g. if last year you require Rs 54 to buy One dollar and this Year you need Rs 60 to buy One dollar, this shows that you have to shell out Rs 6 more or 11.11% more to buy a dollar. This means that Rupee is losing its value against dollar. Opposite to it would be Rupee appreciation.
We need to buy dollars when we purchase something from outside world or in other words when we import. In Imports we have to first buy dollar and then the goods. So if dollar is expensive, so will be the imports. When demand of a particular currency increases its value increases. Like in the case of imports, when we increase our imports, there will be more demand of dollar and thus its value gets increased. And the situation gets aggravated when the supply of dollar also falls due to foreign investors taking their money out like FIIs withdrawing their investments.
Factors affecting Rupee depreciation or appreciation
There are different factors that affect the currency movements and all the factors are interlinked with each other. Impact on one will definitely impact one or more other factors. Let’s understand these in brief:
1. Current account deficit (CAD): CAD is the result of country’s higher imports than exports or where payment is higher than receipts. Gold and crude oil are the two major items In India’s import list. The more you spend on these two, the more we need to import these and more will be the demand of dollars and thus more depreciation in rupee.
2. Capital Account flows: Capital account flows comes in the shape of FIIs (foreign Institutional Investors) and FDI (Foreign direct Investments). FIIs invest in Stock market or bonds and FDIs come in with Business opportunities. Looking at the country’s weak growth outlook, high inflation, high current account deficit etc. FIIs are taking their money back to their country where they are seeing more growth opportunities and also no currency risk. And FDIs are getting impacted by weak government policies, Red tapism and less parliamentary action. If both these investors come in India then demand for rupee will increase as they will bring in dollars to convert into rupees which provide stability to rupee.
3. Interest rate and inflation: High interest rates (as in India) attract foreign investors as they get less rate of interest in their own country , but high interest rates hit local industry and their cost of capital increases. High inflation and interest rates makes our export costlier and thus reducing the demand of our products outside which means less exports. This in turn increases the Current Account deficit and thus rupee depreciation. The unstable currency movements make foreign investors wary of their decision and they prefer to move out of such country.
Let’s understand it with an example:
One FII invested $ 1 million on 25th June’2012 in Indian market and earned 10% return on its investment. The dollar rate was Rs 52, so it invested around Rs 5.2 crore in Indian market. But now when it is about to redeem the investments and book profits the dollar price is Rs 60. So the value of its investment which is Rs 5.72 crore, has become 0.95 million dollar after converting into dollar. Which is even less than the capital invested.
How rupee depreciation does affect personal finances?
Rupee depreciation does not only affect the country as a whole but its countrymen also.
Effect on Family expenses: Fall in rupee increases country’s import bill and Crude oil is the number one import item of India. This in turn increases the oil prices and indirectly the distribution cost which will affect our Grocery bills.
All this in combination hit negatively on Inflation and if inflation rises, then RBI may not even think of rate cuts in near future which means we have to continue with our High Interest Loan EMIs.
No rate cuts mean, slow growth of country and no foreign investment which may make the things worsen by Job cuts.
Effect on Investments: As discussed above rupee depreciation reduces the interest of foreign investors in the country. We as Indians cannot support our country’s stock or debt market as we only like Gold or Real estate. Our investment market is again dominated by foreign investors only. When they take out their investment, stock market is certain to fall, and debt yields will definitely rise.
All in all, Rupee depreciation is a very bad sign for Indian economy and we Indians too. Though there’s nothing much we can do but not to buy gold in next 1 year to stabilize country’s current account situation. Rest depends on government policies which again are more skewed towards their political agenda, as elections are due next year. These economic conditions are not in our hand to manage and thus we are not sure which investment is good to invest and when. So it’s always better for investor to have proper allocation in all asset classes as per the risk profile to manage such kind of situation in a much better way.
Hope the concept of Rupee depreciation is clear to you.
Do share your views on Rupee depreciation.
Nice article. The concept of Re Depreciation and its impact are very well explained !
Nice article in simple language…good work.