Indian rupee has been one of the worst performing currencies amongst those of emerging markets, and the worst performing in Asia. It has decreased in value by 11.4% since the beginning of 2018, and 6.2% since June 2018 alone.
When the Indian rupee was first pegged against the US dollar in 1966, its value was Rs. 7.60. Prior to India stepping into its 72nd year of Independence, on June 28, the rupee plummeted to Rs. 69 per dollar—it’s lowest ever. Since then, the rupee’s fall has been steady, and as of September 6, 2018, it’s at an all-time low of Rs. 72.10. In a nutshell, this means that the value of the Indian rupee is depreciating steadily. Where $1 was equivalent to Rs.69, today it’s worth Rs. 72.
Factors Steamrolling The Decline
As the United States wields its power on its allies, urging them to stop purchasing oil from Iran, crude oil prices are likely to rise even higher, making it one of the reasons for the rupee’s drastic collapse. This, in addition to the flailing Lira and Argentinian Peso, is to blame for this sharp drop in value, as is the undercurrent of a possible global trade war.
What Does This Downward Spiral Mean For You?
It means that the cost of fuel, both petrol and diesel will increase, and so will the price of most other commodities including grains and fresh produce. Imported goods become more expensive, and the rate of inflation is likely to rise too. Similarly, a foreign education or overseas holiday is now likely to cost you more. So yes, your purchasing power, by and large, will take a hit.
The Impact You can Expect On Your Loans
If you have taken a loan, as a borrower, understanding what the tumbling rupee signifies is imperative in being able to prepare for it. Typically, in a situation such as the one we currently find ourselves in, the RBI steps in to control the resultant inflation. One way in which it does this is by increasing repo rate. This is the rate at which the RBI lends funds to financial institutions. As it costs these entities more to borrow from the RBI, the impact of the hike trickles down to you. They can still extend funds to you in the form of a loan, but at a higher rate.
As a result, interest rates on home, personal, gold and auto loans are likely to increase given the current climate. That being said, not increasing the interest rate won’t do the rupee any favours either. It is likely to promote more capital exiting the Indian economy, which will further bruise the value of the rupee.
The light at the end of the tunnel
Fortunately, India has $409 billion parked in foreign exchanges reserves. This means that the RBI certainly has the wherewithal to absorb currency shocks by selling dollars and curbing the amount of rupees in the market, which will give its value an impetus. So, rest assured that the RBI has the resources to ensure that the rupee doesn’t enter a free-fall. However, in the meanwhile, expecting a slight yet steady reduction in the rupee’s value is definitely on the charts, and something you should brace yourself for.
So, if you’ve thought of taking a Car Loan, it’s probably best to go back to the drawing board, reinspect your decision and only raise external finance when absolutely necessary.
The writer is CEO, BankBazaar.