The Indian Rupee hit an all-time low of Rs.70/Dollar this week.
But, why do we care a dime?
How does it affect us and the Indian economy?
What caused such a downfall?
Read on to find out more!
Prime Causes of the Downfall
- The US-Turkey Trade Tensions- Turkey had arrested USA officials on terrorism charges and refused to release him.
The USA, in turn, doubled the import duty on steel and aluminum imports from Turkey in order to impose pressure in Turkey.
But, the Turkish President’s ego wasn’t satisfied and he declared that the country would boycott American Goods. This, in turn, leads to the devaluation of the Turkish Lira, which affected the Economies of various emerging countries, especially India.
This had weakened the global market sentiment forcing the FII’s to exit the Indian Markets.
- Non-Deliverable Forward(SEO)(Hyperlink)- It is an over the counter derivative contract, with the currency as the underlying assets and is settled in US Dollars. The offshore NDF overseas market doesn’t come under the purview of the RBI. As the Turkish crisis worsened, speculators and arbitrageurs seized the opportunity to buy cheaper dollars in India through the NDF market, making a profit through the prize difference of the currency.
- Fiscal Slippage and Rising Current Account Deficit– At the time of announcing the budget in February, the Finance Ministry had kept a target of Fiscal Deficit(Exports-Imports) at 3% of GDP, which slipped to 3.3% of GDP. This was way more than estimated and hence led to FII’s exiting the market.
- Recent Increase in the Repo Rate– Repo Rate is the rate at which the central bank lends to the commercial banks. Recently, the RBI increased it from 6.25% to 6.5% in order to curb the rising inflation and to ensure economic stability. It reduces an incentive to invest and the purchasing power in the short run, hence affecting the rupee on a global scale.
- Rising Oil Prices– Oil Prices have been consistently rising from almost $62 in February to nearly touching $80 in July, the crude oil market has shown volatility and has increased the Indian Government’s Import Bill, which resulted in the higher than expected fiscal deficit
Airlines- India exports over 200 Million Metric Tonnes of Crude Oil every year. Fall in the rupee affects the airlines, cutting short their profits as a major portion of their expenditure is fuel.
Indigo, to date India’s most profitable airlines had also suffered a loss in the first quarter of FY19. Jet Airways is facing a difficult task of keeping the airlines in the air, cutting across salaries of staff in order to ensure that the airlines survive.
Food-Tech- Food delivery startups like Swiggy, Zomato, Food Panda, Uber Eats which are already running in losses may have to wait a little bit longer to earn any profits in the foreseeable future as the cost of their working capital has increased. This creates difficulties in their sustenance.
Cab Aggregator- The cost of operations of Uber and Ola would also increase, which may lead them to increase their prices which could result in the loss of a valuable customer base.
How Does it Affect Consumers?
The Cost of living for consumers is likely to increase as the rupee has been depreciating at a faster than expected rate. The traveling cost will definitely increase.
Those wishing to pursue education for this fall semester in the USA or any other country for that matter would also have to bear higher than expected costs.
The RBI claims that everything is under control and they are working upon improving this situation.
Certain analysts predict that rupee would remain at the 69-70 level for a prolonged duration.
Can such a crisis occur again?
The reason why foreign investors have such a large influence on the Indian Rupee market is that the onshore currency market is currently underdeveloped.
The 24×7 offshore NDF markets provide better price discovery and are outside the jurisdiction of the RBI.
In order to hedge their risks in emerging markets like India, foreign investors are somewhat forced to invest in these markets.
The speculators and arbitrageurs are more than happy to exploit the price difference between the two.
The RBI had earlier tried to intervene in the offshore market but was unsuccessful.
It was expected that the introduction of currency derivatives in India, in 2008, an onshore market would resolve the issues faced due to the NDF’s.
But, they could be traded only from 9-5(Indian Rupee), hence doesn’t yet fulfill the purpose.
Hence, now arises the need to develop the currency market in India. The SEBI and RBI had proposed to increase the timings of the currency derivatives trading in India to 9:30 for the Indian rupee.
These things need to be done to ensure that people invest more in the onshore markets and the possibility of speculation and arbitrage reduces.