A depreciating rupee is usually a reference to its falling value against the dollar. Last year this time with $1 you could get around Rs44-45; now you can get as much as Rs55-55.50 with $1. If you earn in dollars and spend in rupees or have a stack of dollars, its good news for you. Those who have nothing to transact in dollars may think it’s a useless piece of information. But that’s not the case. Here are two basic ways in which the rupee value can affect you.
In an economy where domestic inflation is already very high, a depreciating rupee is not good news. India imports most of the oil it requires and then processes it in-house. So if one barrel of Brent crude oil is $103, then at an exchange rate of Rs45 per dollar, we pay Rs4,635 per barrel and at Rs55 per dollar we pay Rs5,665 for the same quantity.
Moreover, fuel is needed to transport all kinds of goods such as fruits and vegetables, milk, clothes and materials like cement and steel around the country. If the price of fuel is higher, the cost of transporting goods would be higher; this extra cost will be transferred to you, the end-user. This is referred to as imported inflation.
Oil is just one example; basically the price of all imported goods rises if the rupee depreciates and to that extent the domestic price of imported goods such as gold and food items (among others vegetable oil and pulses are large import items) remains high.
Stock market impact
The value of the rupee will also have an indirect impact on your investments. Indian capital markets rely heavily on foreign flows through foreign institutional investors (FIIs). In 2011, FIIs invested Rs6.11 trillion in equity compared with Rs2.85 trillion from domestic institutional investors (DIIs). So far in 2012, FIIs have invested Rs3.48 trillion in equity versus DII investment of Rs1.39 trillion. Now, if the rupee is depreciating, an FII with say $100 invested in Indian equities stands to lose even if the actual price of equity remains the same. This happens because as the rupee depreciates, the amount of dollars that can be bought per rupee is lower. So if $100 at an exchange rate of Rs45 per dollar could buy 450 units of a stock priced at Rs10, at Rs55 per dollar (assuming the price of the stock remains at Rs10) the foreign investor will get back only $81. This means in a depreciating rupee scenario, FIIs would be wary of investing in India. Since they hold a majority of investments as of now, this can keep stock prices subdued.