Fall in the Rupee Value and Its Impact

Topics: Inflation, Monetary policy, Interest rate Pages: 5 (1334 words) Published: July 9, 2013
Fall of the rupee: Impact on inflation and Loans





What is Inflation ?

Inflation is a rise in the general price level and is reported in rates of change. Essentially what this means is that the value of your money is going down and it takes more money to buy things

India Inflation Rate

The inflation rate in India was recorded at 4.70 percent in May of 2013. Inflation Rate in India is reported by the Ministry of Commerce and Industry. Historically, from 1969 until 2013, India Inflation Rate averaged 7.73 Percent reaching an all time high of 34.68 Percent in September of 1974 and a record low of -11.31 Percent in May of 1976. In India, the wholesale price index (WPI) is the main measure of inflation. The WPI measures the price of a representative basket of wholesale goods. In India, wholesale price index is divided into three groups: Primary Articles (20.1 percent of total weight), Fuel and Power (14.9 percent) and Manufactured Products (65 percent). Food Articles from the Primary Articles Group account for 14.3 percent of the total weight. The most important components of the Manufactured Products Group are Chemicals and Chemical products (12 percent of the total weight); Basic Metals, Alloys and Metal Products (10.8 percent); Machinery and Machine Tools (8.9 percent); Textiles (7.3 percent) and Transport, Equipment and Parts (5.2 percent). This page includes a chart with historical data for India Inflation Rate.

Record fall in Rupee from Rs 55 per USD to Rs 59 per USD has left many in panic with questions as will it decline further or pause at this level or regain in future. Sujan Hajra, chief economist Anand Rathi Financial services says “Rupee has depreciated 8% against the US dollar since beginning May 2013, despite active interventions from the policy makers. However, rupee was not the only currency that got hammered. Brazil, Australia and South Africa witnessed far sharper fall in their currency in the past three months.” However this decline could also not be one way as going forward rupee is expected to bounce back. Adds Hajra “Rupee likely to rebound by September 2013 on normalization of gold imports and falling commodity prices to help lowering India’s CAD.” Falling value of rupee brings many times good result for the economy as loss on imports is neutralized by gain on exports. However it works so only when trade deficit is not big but when you have much higher level of imports than exports the situation becomes alarming for the economy. Oil prices had already been surging and given India’s dependence of oil and gas import which accounts for around 80% of domestic demand now with the depreciation in value of Rupee will compound the trade deficit problem significantly. This will make oil marketing companies to increase the gasoline prices. Any increase in the prices of oil gas has far reaching impact on increasing inflation with rise in energy cost to transportation cost.  

Impact on loans: Inflation has been a major focus area for the RBI and it has already indicated in monetary policy review in June that only a durable receding of inflation will make room for further monetary easing. Even after RBI cutting Repo rates 3 times by overall 75bps so far in the year 2013 banks have not passed on any benefit of these rate cuts to the borrowers as there has hardly been any reduction in lending rates by the lenders. Due to tight liquidity conditions and high cost of deposits lenders are finding it difficult to reduce their lending rates and were waiting for RBI to reduce the CRR or SLR to reduce their lending rates. However with the increased concerns of inflation rising in future due to falling rupee the scope of a CRR or SLR reduction even in July by RBI is getting limited. The only hope for a monetary easing in July hinges on monsoon performance. Hence you will have to wait a little longer to see your EMI coming down.

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