Everyone is talking about the weakening rupee. What does it mean? Does it concern us?

In last month”s trivia, we saw the Indian Rupee was the most undervalued currency in the world. Over the last few weeks, the Rupee weakened further and is now close to Rs. 70 for 1 US Dollar. What exactly is going on and why should we be concerned?

Rise and fall

Different countries have different currencies and an exchange rate is the rate at which one currency is exchanged for another. For example, right now, we need to part with around 68 Rupees to buy one American Dollar. A few months back, it was more like Rs. 53 for one US Dollar. A few years back, when Indian economy was doing very well, we needed only Rs. 40 to buy 1 US Dollar. What does all this mean to us normal people? How does all this change in Rupee value affect our life?

Compared with the time when the Rupee was 40 per USD or even Rs. 53 per USD, now everything we import becomes more expensive. Why so? Let us say, you want to buy that cool LED TV from Korea. Let us assume that the LED TV costs USD 1,000. Let us assume that over the last five or six years, the international price of that LED TV has not increased at all. Also note that international trade always happens in USD. In other words, when we trade with other countries, the goods are quoted in USD and the payments are also settled in USD. So, six years back, you could have bought that LED TV for Rs 40,000. How did we get this number? USD 1,000 multiplied by the exchange rate of Rs 40 per USD. Today, if you want to buy the same LED TV, it costs Rs 68,000. Thus all imported items become expensive when the amount of Rupees needed to buy 1 USD goes higher. This is also called currency weakening. In other words, the Rupee is losing its value against USD and therefore weakening against the USD.

India imports a lot of crude oil. Crude oil is refined to produce Petrol and Diesel. You must have seen that recently the petrol and diesel prices were increased yet again. Over the last few years, the fuel prices have increased relentlessly. Increase in fuel costs increases the transportation costs. The cost of commuting goes up for all of us. Your bus driver needs to spend more on diesel now. Likewise, the cost of transporting goods increases. Vegetables, fruits, cars everything costs more now. Heavier the goods and longer the distance it needs to be moved, higher the transportation cost.

Thus, weakening of the Rupee increases the import prices and also the domestic prices of goods and services because of our oil imports. Along with this, the exporters start getting more Rupees for the products that they sell in international markets. So they start selling more outside India and because of reduced supply, the price of what they sell within India increases.

Young World Money-Wizards Quiz # 25 : If instead of weakening, the Rupee strengthens against the USD, how does it affect the inflation in India?

If you know the answer, email it to youngworld@money-wizards.com. The first five correct answers within seven days will each be awarded flipkart e-vouchers worth Rs. 250. The results and the answers will be published at www.money-wizards.com.

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