The government has slid into a black-hole of policy paralysis; the stock market continues its southward journey each day and now to add to the woes of investors, the rupee or currency depreciation has got people worried. Does Currency depreciation Impacts Investments – Yes. Let us check- How?
The silver lining is that we should be able to do better going forward. For the end user, the currency depreciation and its impact is bad news in the offing – his wallet is destined to become more lighter.
Where does the impact of rupee depreciation in India affect most ?
Currency Depreciation – Pay more for grocery
India imports basic raw materials in large quantities. They are crude oil, iron ore, medicines, fertilizers to name a few. These items are indirectly used by investors in items of daily consumption.
For example, take crude oil. It is used in transporting goods across the country. Since the depreciating rupee means an increased cost for fuel, transporting the goods across the country will now result into an increased cost. That will be passed on as increased costs on the goods being transported which could easily be items of daily consumption for you and me.
Fuel is also an ingredient of items like soaps, detergents, shampoos which will become very expensive. Your monthly grocery bill will inflate and I don’t think we have a choice here to bring down the bill.
But how does a falling rupee increase the costs of these items – see the maths below.
- Let’s say Rs 47 = $1 .
- If the value of the rupee falls until Rs 50 = $1, it means the rupee has weakened and the dollar has strengthened.
- If the value of the rupee rises and Rs 45 = $1, then the rupee has strengthened and the dollar has weakened.
- Now, if the rupee value is Rs 47 = $1, and a person wants to covert $1000 into rupees, it will be Rs 47,000.
- If the rupee strengthens to Rs 45, it will be less (Rs 45,000) when converting.
- If the rupee weakens to Rs 50, it will be more (Rs 50,000) when converting.
- The cost of imported materials will increase with a falling rupee.
As you can see, the weakening of the rupee is resulting in more cost to the government which then passes on the higher cost to end consumers.
Pay more for entertaining yourself
Most of the things that we use in daily life for entertainment have a foreign body in it. The presence of imported material in such entertainment units will increase the cost of the items themselves.
Electronic consumer goods like LCDs, televisions, laptops, desktops, notebooks, mobile phones will now become costlier.
The same is the case with food chain outlets whose bottom margins will get impacted because of an depreciating rupee and they may pass on the cost to consumers to keep their bottom line intact. Going to McDonald’s and Pizza Hut might be a bit costlier.
While the cost at these outlets might not go up all of a sudden, check out the increased costs before gnawing your mouth into a burger. And if you wanted to buy consumer durables for your home, try and stick to the desi brands.
Image from BusinessToday
Foreign education will sky rocket because of currency depreciation
Many Indians cross continents to educate themselves in the best of the colleges in the USA. That cost will now be higher than what it was earlier.
The college tuition fees, the rent of the room, the cost of a basic meal – everything will cost more now.
A meal which used to cost 5$ (Rs 5*45 = 225 Rs) will now cost more (Rs 5*53= 265 Rs). And we haven’t even begun to adjust these prices for inflation ! If you do that, you could break your back.
Many students take education loans here in India to fund their foreign education. With the above mathematics in mind, that loan amount will now increase. For example, if the cost of education was 50,000$ and you were taking a education loan for it, then the loan amount would have been 50,000 * 45 = Rs 22,50,000. But now with the rupee falling to Rs 53 approx, it will be 50,000 * 53 = Rs 26,50,000. That will surely hurt.
I don’t think students can push out their foreign education plans so the alternative here is to increase your down-payment for the loan amount and get more money for the daily living costs in the foreign campus.
Foreign vacations will cost more due to currency depreciation
The falling rupee is bad news for those frequent fliers who like to spend their vacation out of the country where dollars rule the roost.
The air fares are going to go up and so will the shopping bill. That stay at foreign locations will also be costlier.
To make amends here, try those destinations which don’t have much to do with the dollar – Asia still boasts of places that are out of this world.
Of course, you could cancel your holiday plans altogether but there isn’t a better time than summer when the kids have school holidays. So you might end up taking that flight to a dollar destination and be poorer by lakhs of rupees.
Currency Depreciation & its Other impacts
Any sector that is dependent on imported material will see an increase in its operating costs. They in turn will take counter measures to keep their profits in line with guidance provided for the next quarter/year. A company could go in to look lean and mean – this could result in retrenchments of staff with the expectation that less staff can handle more work.
Salary increments could also be frozen for existing employees. For those companies that export work to the US, like the IT companies, it is a rosy period.
If you were to planning to buy an automobile, just hang on till the tide turns. Cars have imported components in them and their prices will increase. In fact, quite a few of them have already done so in the first 5 months of this year. It might be prudent to wait for the prices to stabilize before taking a decision.
Do you think we will see light at the end of the tunnel pretty quick ? Are you impacted and what are your thoughts ? Take a quick poll.
Very good analysis and great timing too, Rupee breaches 54 levels. It will effect everyone of us, a larger hole in the pocket.
It’s a good time to be an NRI and send money to India now, you won’t get such levels. I remember couple of years ago i used to send money to India when rupee was at 40 levels.
Good for IT & BPO companies too.
Yeah I think it brings some respite to the beleaguered IT industry. The way Infosys is being knocked around in the media, the ticker I am sure needed some catalyst to go up.
This quarter results of IT companies will be good I guess.
Hi,
A very sensitive topic – and very hot as of now – not only in India, but outside India amongst NRIs.
A few of my thoughts as well :
1. Rupee depreciation is making NRIs very rich – by 20%. Resulting in a lot of inward remmitance being sent into India every day. We shouldn’t really underestimate the financial power of NRIs outside India 🙂
2. Gold should become expensive. Gold in international markets is quoted in US Dollars. A slight increase in $ prices, would result in Gold in India becoming more expensive (other things being constant). You may want to refer to a very detailed analysis on Gold prices at http://insight.banyanfa.com/?p=363.
3. Owing to Rupee depreciation, the holding value of FIIs would decrease significantly. Hence they would report losses on their existing holdings. However,any more investments would result in getting the stocks / investments at a bargain, considering Rupee is cheaper now !
4. Exports will become more competitive and if the exporters want they can price their commodities/ services cheaper in the market to gain market share / volume. This would result in gaining market share and probably attracting more Tourism in India.
5. Contrary to above, unfortunately we import more than we export (owing to Oil), and hence our Balace of Trade would get screwed up, resulting in possible downgrades by rating agencies.
Regards
BanyanFA
@BFA,
Good analysis, you mentioned price of Gold would increase, Gold has already corrected by Rs. 1000 or so in domestic market. June & July are lull season before festival season picks up in August.
Rakesh – if you would notice, I did mention “(other things being constant)”. Price of Gold are influenced by multiple dynamics which I have detailed in the link above. One of the factors is exchange rate.
regards
BanyanFA
@BFA,
Yes, excellent analysis, looks like you did an extensive research. Just when i was talking about Gold correcting, it jumped by Rs. 700 in one day.
Amazing contribution BFA. Great stuff.
Good perspective BFA. At least you could see some positives out of this 🙂
This is a great article for common man to understand the dollar impact in day to day life. Many times people see and hear that dollar has strengthen and wonder so what? I don’t deal with USD so how would it impact me? This article breaks that myth and increase the awareness, which is a positive move.
Personally, I don’t see much impact on me. The primary reason, I am not really into foreign brands. I don’t shop or eat at foreign brands plus the frequency of such things is also minimal. The only thing that impacts big time is the oil prices, which I think is something completely unavoidable. I think it’s time we start planning for oil inflation in our financial planning, a new chapter for CFPs? 🙂
If we act sensibly we can reduce the impact of rupee depreciation. Here are a few tips: –
– Eat at local shops, why always McD and Pizza Hut? Local junk food is equally good (or bad, depends how you see it).
– Holiday in India, there is so much to explore here.
– I never understood the fascination of foreign studies. If you are a good student, you can do good anywhere and get a good job anywhere.
– For grocery shopping, try local kirana store. It is a myth that going to big supermarkets will give you big discounts and better quality goods. End of the day suppliers for both the sellers are the same farmers in India.
– Do car pooling and save on oil. This is discussed everywhere for such a long time but still people don’t do it.
There are plenty of other ideas that we can explore and implement if we are willing to. But the easiest of all is to keep blaming the government and keep spending more :).
Vivek, thanks for your comments.
I think you have hit the nail on the coffin – the fact that we just don’t do things at all and keep cribbing.
I think I like your local kirana store shopping a lot and will personally push to go there ALWAYS this year. I do end up at the super markets with not much of a strong reasoning.
Car pooling does not work for me. It never will. In fact, my wife wants to buy a car now and I am pulling my hair to understand whether it should be petrol or diesel.
Holiday in India is soooo good – why go anywhere else but hey, Las Vegas ain’t here at all.
Keep spending more !!
Hi,
I may again want to add a slight taste to the flavour – OIL. I think this is the major reason behind India’s existing problems. If Oil was quoted in INR in international markets, we would have had natural hedge against currency movements. However, we are not that lucky :(. Oil being quoted in US Dollars, costs more now per barrel in INR terms. Though Oil corrected 10% in past couple of weeks, the currency depreciation made oil more expensive in India. People would shout on top of their throats reading that Crude Oil has gone belo $100 mark and henc Oil Marketing companies should reduce the oil prices in India – how can they do it ? It costs even more now for them to procure Oil !!
And if Oil costs more, every item which you consume would bear the brunt of it, from sugar to your Air Con. If Oil prices won’t be increased by the Govt to prevent inflation going up, this would worsen the budget deficit, further depreciating the Rupee ! Hence it is really a vicious circle which won’t stop unless the Oil prices are increased in the economy to reflect the actual cost of production in India. This would then create a natural demand reduction – if 1 litre of petrol costs Rs. 150, I am sure that we won’t go in our car to the near by store to buy a bottle of coke ! Cycles would work more efficiently in that case :), hence cutting down the costs of oil demands and making a perfect business case for people to use oil efficiently.
You could then start justifying the business case to retire your existing fuel guzzling car and getting a smaller car which is more efficient and that would start reducing the demand pressure on Oil!
I am sorry if the discussion started from Currency, but drifted to Oil, inflation and Budget deficits. I can’t avoid pulling these topics as they are so closely knitted together and need to be looked in conjunction to identify the real problem. Currency doesn’t just depreciate in the air. The factors which influence the deprecations need to be rectified to prevent it !
Regards
BanyanFA
@BFA,
Very good insight on Crude. Global crude prices are falling down but in our country petrol prices are going up. When crude price fall in foreign countries petrol prices fall too but in our country its the other way round.
News is out that petrol prices will be up by Rs. 7.5/litre from today midnight. I know state owned oil companies are in loss but to raise the prices by Rs. 7.5 per litre at one go…
Does this make any sense?
http://www.rediff.com/business/report/petrol-prices-up-by-rs-7-point-50-a-litre/20120523.htm
It definitely makes a lot of sense. It is better that the Oil prices are raised, rather than allowing the people in general to suffer indirectly by the blow of budget deficits which has far reaching consequences (generally invisible to a common man). There would be a lot of blame game whereby people would say that Globally oil prices are going down, but Petrol prices are being increased – well the reason is Diesel prices. Govt wants to subsidise Diesel to prevent fueling up the inflation – as Diesel has a more direct impact on the pricing of commodities in the country considering its usage by Transportation,Logistics & Energy sector. And hence the poor Oil Marketing companies have to recover the losses on Diesel from Petrol ! Which again makes perfect sense.
I am glad that my analysis on Oil just yesterday got reflected in practical by OMCs raising the Petrol prices. I am not happy about it in general, but subtly glad that it would reduce the brunt on the budget deficit, currency depreciation and promote more efficient usage of this scarce commodity.
I am not sure whether increase in prices will “promote more efficient usage of this scarce commodity”. Is there any data to reflect that apart from the fact that people are rushing to buy diesels sedans…
@TWW
“if 1 litre of petrol costs Rs. 150, I am sure that we won’t go in our car to the near by store to buy a bottle of coke !”
I think that’s how “promote more efficient usage of this scarce commodity” will come true. And I think somewhere we as consumers are to be blamed as well for misusing this scarce natural resource.
I would buy a bicycle Vivek.
Amazing explanation BFA. They are indeed very closely related no doubt.
And as I write this, I am planning to burn down my car, the petrol prices have just been increased, again !
Careful! Insurance does not pay for it 🙂
Or may be move to Goa?
Very well written BFA. I completely support your comments. However, I feel that petrol prices can be controlled by putting sensible amount of taxes on it. I read somewhere that taxes are as high as 40% of the basic cost, is it really justified? If yes, then how is Goa surviving with the recent cut on taxes?
Rupee / Dollar comparison, would love to see Rupee back to 30 levels.
Some analysts say rupee might touch 100 levels in a year or two… Strange
1990 1 $ = Rs 18.11
1991 1 $ = Rs 25.79
1992 1 $= Rs 28.95
1993 1 $ = Rs 31.44
1994 1 $ = Rs 31.39
1995 1 $ = Rs 34.92
1996 1 $ = Rs 35.83
1997 1 $ = Rs 39.15
1998 1 $ = Rs 42.58
1999 1 $ = Rs 43.45
2000 1 $ = Rs 46.88
2001 1 $ = Rs 47.93
2002 1 $ = Rs 48.23
2003 1 $ = Rs 45.66
2004 1 $ = Rs 44.00
2005 1 $ = Rs 46.11
2006 1 $ = Rs 44.49
2007 1 $ = Rs 39.33
2008 1 $ = Rs 49.82
2009 1 $ = Rs 46.29
2010 1 $ = Rs 45.09
2011 1 $ = Rs 51.10
2012 1 $ = Rs 55.44
It completely depends on the growth of Indian economy, I don’t understand how analysts can predict the growth of Indian economy? If they were so good they could contribute in the improvement of the economy. Why just sit and predict all the time?