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Tuesday, July 17, 2012

The Great Fall

Rupee has been deprecating against the dollar for the past 4 months and many analysts are predicting it that it will depreciate further. Rupee depreciation means that India’s currency has lost its value in comparison to US dollar, now the question is what will be the impact of rupee deprecation, well at this point it is difficult to quantify it but given below are some of the possible effects of rupee deprecation –

1. Inflation which has been haunting Indians for past 2 years will rise as India is a net importer, and crude being primary import, the cost of importing crude will rise even if the price of crude falls in international markets. Hence inflation will be the key risk due to deprecation of rupee.

2. Indian corporate sector which import raw materials from abroad will also be hit hard as they have to pay more for imports and therefore their profit margin will be hit hard.

3. Small importers will also be in pain as they too have to pay more for dollar, which in turn would make some smaller importers to go out of business or may even lead to bankruptcy. The prices of all imported white goods, such as laptops, mobiles and refrigerators are likely to witness a spike in the near term. The sharp rise in cost of imports is bound to be reflected in the prices of all such goods.

4. The companies which import large quantities of raw material will increase price for the end consumer. This shows the sign of increase of price in automobiles. Also, the consumer can see an increase in fuel prices. The prices of food items may also hit a spike due to the cost of transportation.

5. Exporters like IT companies will be benefited because of rupee deprecation as they will receive more rupees per dollar which improve their bottom line and hence more profits for them.

6. Other people like non resident Indians who remit dollars to India will also benefit out of this, and also foreigners coming to India will find it cheap to come to India which will in turn benefit the hospitality sector.

7. Students going abroad for further studies and Indians going to foreign travel will be pinched hard due to his movement in rupee. Their food, living expenses and stay will see a high cost. The students going abroad will have a factor of 10 – 15% rise in cost due to weakening rupee. Those who take an education loan will have to bear a higher burden as the loan requirement will shoot up.

Rupee deprecation has more disadvantages than advantages and if this fall is not controlled in time than it can have serious effects on the Indian growth story and also it can lead to downgrading of Indian economy by rating agencies all over the world.

Things which May give Relief

Within the fixed asset category, a weak domestic currency is broadly a good news for investors who put their savings in the less risky debt products. When the domestic currency weakens, central banks usually try to buy back dollars in an effort to support the local unit. This leads to a shortage of cash in the system, which theoretically means higher returns on your deposits. Also, since a weaker currency tends to trigger a spike in inflation, cost of cash is bound to go up and thus debt assets should give better returns.

Domestic gold prices are likely to gain; if gold is already a part of your portfolio, you will benefit if rupee slides further.

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