How a falling rupee affects your wallet

On Tuesday, the rupee fell to a lifetime low of 58.99 against the dollar. In 2011, $1 could get you 44-45; on Tuesday you could get as much as 58.99. A depreciating rupee makes a host of goods and services expensive as India imports, in large quantity, one of the most basic and widely used commodities—crude oil. Here is how a falling rupee affects everyday spending and investments.

Stock market

The value of the rupee will have an indirect impact on your investments in the stock market. When rupee depreciates, a foreign institutional investor (FII) invested in Indian equities stands to lose even if the actual price of equity remains the same. This happens because with the same amount of rupees, you will get lesser dollars. Hence, even if the rupee investment gains, the dollar value will not increase unless the returns are more than the fall in rupee (against dollar). In this case, FIIs would be wary of investing in India. Since FIIs contribute to most of the stock market activity, this can keep stock prices subdued.

Foreign trips and study

If you plan a foreign trip, a falling rupee can dampen your travel spending as you will have to shell out more on accommodation and shopping. You may need to re-evaluate your travel budget, maybe change to a less expensive destination or cut the trip short.

A falling rupee will pinch students who are planning to go abroad or are currently studying abroad. Says Jairam Sridharan, head consumer lending and payments, Axis Bank Ltd, “Unlike vacation plans, you can’t postpone your plans for higher studies. You will always have to factor in currency fluctuation if you are going to a foreign land.”

Imported inflation

The domestic inflation is already high and a depreciating rupee is bad news as the price of all imported goods will rise. India imports most of the oil it requires.

If one barrel of Brent crude oil is $103, then at an exchange rate of 45 per dollar, we pay 4,635 per barrel and at 58 per dollar, we pay 5,974. Oil is needed to transport all kinds of goods and a higher price paid for oil might finally result in a higher price for everyday items such as vegetables and groceries.

Exporters

Not everybody loses out, the group that stands to benefit are the exporters such as software services, garment and jewellery exporters. They have customers who bid and pay for their goods and services in dollars and then this is converted into rupees by Indian firms. These firms will now earn more for the same amount of sales as each dollar can buy more rupees.

Foreign-focused mutual fund (MF) investors

If you have invested in overseas MFs, apart from the fund’s performance the rupee movement will also come into play. Says Srikanth Meenakshi, founder and director, FundsIndia.com, “When rupee depreciates, the net asset value of your overseas MF will definitely go up. But that doesn’t mean that you should cash in on it. Instead of looking at an exchange rate growth, you should look at the intrinsic growth of the fund.”

What this means is that you should foremost look at the investment objective, evaluate the fundamental strength of investing in overseas equity and then decide. The currency impact should only be incidental to the investment decision.