The rupee’s depreciation against the dollar is seen to be beneficial to the Indian economy in some ways, and detrimental in other ways. The rupee fell to 53 against the dollar, its weakest in nearly 2 years, early on Wednesday as worries Europe could be heading for another banking crisis rattled global markets. Let us quickly analyze theimpact of Weak Indian currency on different institutions.
Impact on Inflation
Weaker rupee complicates government’s battle against runaway inflation. Imports become more expensive. The dramatic dip in rupee’s value has a very bad impact on the economy. While many currencies have been weakening against the dollar, India has been the worst performer in Asia . With the increase in dollar rate, the rupee remains weak & Indian imports of Crude Oil, edible oil, pulses & Capital goods becomes more expensive. The rise in dollar rate adversely impacts government’s efforts to curb inflation.
Impact on FII inflows
The focus is particularly on crude oil price. Due to the Financial market turmoil, foreign capital inflows have almost dried up, but the demand for Dollars is rising. India ’s crude oil import bill has become staggering. Due to rise in the Crude Oil Price, the Oil Marketing companies are shelling out 40/50 dollars more/barrel. Hence there is an increase in the Dollar demand, which have been almost sucked.
Impact on Crude Oil
Higher oil prices put pressure on inflation, but it helps some importers to import Capital Goods. Input costs go up across import-intensive industries. With the increase in dollar rate, the rupee remains weak & Indian imports of Crude Oil, edible oil, pulses & Capital goods becomes more expensive. The prices of petrol may increase from tonight. This will be the 8th increase in last one & half year.
Impact on Indian IT companies
Despite the global financial turmoil, the Indian IT industry is expected to see some growth owing to the depreciating rupee during the third quarter of FY11. The sharp rupee depreciation against the dollar during the quarter is expected to boost top lines quarter on quarter. The depreciating rupee is the only positive sign for the Indian IT industry amidst the shadow cast due to global financial meltdown. This a welcome signs for the companies which are exporting out of India . A dip in the rupee helps Industry; particularly exporters, to meet the cost & wage bill better. In the times of global slowdown, the exports get the edge. Higher exports stimulate better jobs & discourage imports.
Impact on the price of Gold
Even if the gold price remains stable in terms of dollar price, depreciating Rupee means gold price will increase in terms of rupee terms as Gold price (In Rs.) is directly proportional to Dollar Strengthening, Gold price(in $) & inversely proportional to Indian Rupee Strengthening. Click here to check out how gold is related with Indian economy.
Impact on companies which have loans in terms of Dollar
The depreciation also hurts Indian companies that have taken out loans in dollars. The interest on those loans, which is valued in dollars, effectively becomes more expensive as the rupee weakens. Indian companies hold about $221 billion of such loans
Impact on Indian Stock market
Weak rupee means that Indian stock market will remain down as FII will keep away from the Indian markets Indian Rupee strengthens.
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