What if the rupee hits 100? Rupee sank below the 70 mark today for the first time since February 2018. Experts have been predicting further depreciation. An ET poll in February said that the rupee may weaken beyond Rs 70 to the US dollar by the end of the year. Deutsche Bank, DBS Bank, Bank of America, Yes Bank, IFA Global and Edelweiss Financial Services were among those predicting the local currency to hit the 70-mark or fall beyond it. Just two of the 18 market participants polled expect the rupee to firm up from the level at that time (67.32 a dollar).
Why is the rupee depreciating?
Rising crude prices in global markets is one reason. US oil rose above $70 a barrel for the first time since November 2014 as traders braced for a re-imposition of sanctions on Iran. India imports nearly 80 per cent of the oil it consumes which weighs down on the rupee. The other reason is a strengthening dollar. The dollar stayed near its 2018 peak today after US jobs and wages data did little to water down perceptions of strength in the US economy. Strengthening US economy pulls back money from emerging markets.
How bad it is?
A weak rupee against the dollar makes imports costlier. Some imports cannot be cut down such as oil, which can negatively affect India’s current account deficit. In a vicious cycle, a depreciated rupee makes oil costlier since it’s India’s chief import. Costlier oil means costlier vegetables and groceries since transportation costs go up. Weak rupee also makes education and holidays in foreign countries more expensive.The goods that use imported components such as computers, smartphones and cars also get more expensive. All import-based industry and trade suffers.
How good it is?
A weak rupee is good for exporters since they get more money for their exports. All export-based industry benefits from a weak rupee. For example, information technology and pharma companies benefit from a weak rupee since most of their revenues come from foreign countries. Economic Affairs Secretary Subhash Chandra Garg said a few days ago that the rupee at 64 to a dollar had “hurt exports” and was not justified by the real exchange rates. “My sense is that there is stability now and this level of about 66-67 (to a dollar) should be the level that should prevail for some time,” he said.
Source: The Economic Times