Why the rupee keeps losing value and what it means for your budget

Why the rupee keeps losing value and what it means for your budget

A weaker rupee makes India's oil imports costlier and could push up the inflation rate. This may force the central bank to revisit its current policy of lowering interest rates.

PHOTO: Reuters PHOTO: Reuters
The rupee's value against the US dollar is taking a beating again. Unlike dips in the last two years, this time the cause has more to do with global influences than domestic weaknesses.

On May 29, the rupee's value against the dollar sank to an intraday low of Rs 56.37, its lowest level since the last week of July 2012. In May, the rupee depreciated about 4.7 per cent to around Rs 56.17 against the dollar.

To put the current slide in perspective, in the two months ending June 27, 2012, the rupee fell 8.6 per cent against the dollar to reach Rs 57.21. Over the past two years, it has depreciated about 24.6 per cent.

On the rupee's current weakness, Samiran Chakraborty, Managing Director and Regional Head of Research, Standard Chartered Bank, says: "It is more a global phenomenon than a local phenomenon."

Globally, funds have begun to flow to the US, as expectations of the country's economic performance have improved. The US dollar index - a measure of the value of the dollar against a basket of important currencies such as the euro - has been appreciating of late. On May 29, the dollar index was around 84, according to Bloomberg.

Raj Majumder, Founder and CEO of Auroch Investment Manager, a wealth management firm, says a reading above 80 in the index indicates that things are looking up for the dollar.

Besides the global trend, a couple of domestic factors seem to have influenced the recent trend in the rupee-dollar exchange rate. According to Majumder, the market perception is that there has been an unusually large demand for dollars from oil marketing companies that want to finalise supply contracts to take advantage of a weak trend in crude prices.

Besides, companies which have redemptions coming up on their foreign exchange borrowings have been buying dollars.

How long will the current spell of weakness continue and what is its impact on the economy?

The shift to the US by reducing exposure to other countries has not ended. "The process of people realigning their portfolio position is still on," says Chakraborty. The impact of this realignment has been strong enough to counter healthy inflows in May from foreign institutional investors. FIIs bought $5.1 billion worth of Indian securities during that month.

The current spell is likely to have an impact first on inflation and then on monetary policy. "That seems to be the real and present danger," says Chakraborty.

India's largest import is crude - it imports oil worth close to $150 billion annually. A weaker rupee makes this costlier and pushes up the inflation rate. In April, inflation as measured by the Wholesale Price Index was 4.89 per cent, below the Reserve Bank of India's target of 5 per cent.

Chakraborty's fear is that the current weakness in the rupee could push the rate over five per cent and force the central bank to revisit its current policy of lowering interest rates.

If that happens, don't expect the monthly instalments on your home loan to fall soon.