The weakening rupee will make crude oil, fertilisers, medicines and iron ore, which India imports in large quantities, costlier. Though these items are not for your daily consumption, they impact your finances indirectly. FMCG such as soaps, detergents, deodorants and shampoos, of which crude oil is an input, are likely to become more expensive. Pulses and oil will also be affected.
The depreciation of rupee will impact the prices of automobiles. The input costs will rise, as these companies use imported components. Some companies will have to pay higher royalty to foreign parent firms. Many companies have foreign currency loans in the form of external commercial borrowings and foreign currency convertible bonds. That will also go up.
The increasing crude oil prices and trade war concern between US and China are the reasons behind rupee weakening.
The rupee weakened past the 69 mark for the first time on Thursday to hit a record low against the US dollar, following further spike in global crude oil prices and concerns of higher inflation and widening current account deficit.
The rupee opened at 68.89 and hit an all time low of 69.09 a dollar. Around 10 am, the currency was trading at 69.05, down 0.61% from previous close of 68.63.
The previous all-time intraday low for the rupee is 68.86 against the dollar-a level hit on Nov. 24, 2016. The all-time closing low stands at 68.82, breached on Aug. 28, 2013.
The sudden surge is due to global oil prices touching the highest level since 2014 after data showed US crude inventories fell by the most in almost two years and exports climbed to a record.
Oil prices have been touching a high continuously after US pressed its allies to end all imports of Iranian oil by a November deadline and said it didn't want to offer any extensions.
So far in 2018, the Indian currency has weakened 8.1 per cent, making it the worst performer in Asia, plunging over 7.3%. It is followed by the Philippine peso and Indonesian rupiah-down 6.7% and 4.3%, respectively. The Chinese yuan has depreciated 1.6%.
A fall in Asian currencies, with Chinese Yuan sliding for the 10th straight day, its longest losing streak since March 2014 also dampened the sentiment. Traders fear that US-China trade war may evolve into a currency war.
They also add that a trade war between US and China could curb growth at a time when the US Federal Reserve is accelerating its rate hikes and oil edges higher.
While a weaker rupee will hurt existing investors, it may help the real economy. According to RBI, the 36-country trade weighted real effective exchange rate (REER) has fallen to 114.67 in May. A year ago, this index was at 119.48. A level higher than 100 suggests overvaluation while a level below that suggests undervaluation.
The so-called overvaluation is seen as one reason behind the sluggishness in Indian exports. It also makes imports more viable, thereby worsening the core trade balance. The recent fall in the currency could help correct some of the overvaluation of the currency.