Rupee Depreciation – How Will It Affect You
Rupee depreciation is a cause of concern and is making great news in the recent times. Depreciation leads to imports becoming costlier which is a worry for India as it meets most of its oil, demand via imports. In fact after the breaking news of IPL scam the next big news was the rupee touching Rs.60 to one US dollar.
The currency exchange rate has been in mid 50’s against the dollar, but after the recent poor GDP growth and slowdown in the economy the dollar has strengthened against the rupee. The fall has been quite steep and took everyone by surprise. Some strength in the US economic recovery has supported the fall.
Impact: The major impact on the economy will be on imports, which will get costlier. Since India imports oil, gold and various other raw materials the industries and sectors dependent on this will have to bear huge burden of importing costs. But on the other side companies exporting textiles, software, etc will benefit (assuming they have not taken hedging or derivatives positions expecting a rupee fall).
Rupee Depreciation – How Will This Impact The Common Man ?
There are several ways in which a common man on the street will get affected by this rupee depreciation. There could be a mix of positive and negative effects depending on your specific situation. Moreover, the intensity of impact and relevance would differ from individual to individual.
However, let me explain the various cases, and you can pick the ones which are relevant. I’ll try to provide a few ideas or suggestions on how you can minimize the negative impact, but you would be the best judge to find the best solutions.
This is the biggest expense head for common man. The greatest impact will be on goods or products which are imported, where the producer of the product pays more rupees for dollars, and the producing company will pass on the cost to you (the consumer). Typically the byproducts of crude oil such as petrol, diesel, soaps, cosmetics (that have petrochemical ingredients) will go up.
What you can do? Essential expenses cannot be avoided but you can reduce the consumption a bit. How? Cut down on leisure travel, cosmetic purchases, entertainment, etc. Here you need to draw the line between at what is essential and what can be avoided fully or partially. For instance cutting down on frequent travel trips, or for entertainment (movies) will help save your hard-earned money.
Some sectors which are dependent on imports may get negatively impacted. Companies might cut costs, reduce salary hikes, perks, etc. Or you might find lesser opportunities as hiring has come to a standstill. For instance in sectors like oil marketing, textile, etc might get affected.
What you can do? If you are in a reputed organization with strong business pipeline you can be patient and wait for the situation to improve. However, you can be open for any new opportunities or change. Some people might be interested in learning a new skill, trade, business, etc. Alternatively, you can also see how your existing skills and experience can be used in new sectors or avenues.
People who invested in gold in the past might find that the depreciation in rupee was a positive factor increasing the value of gold. However, this time gold prices dipped by 15-20% and touched 3 year lows. Hence the gold prices also fell, and the fall was slightly cushioned by the rupee depreciation.
If you invested in equities you will find sectors such as IT, FM-CG and pharma doing quite well. Export oriented sectors will fetch better revenues due to favorable currency exchange rates. Avoid sectors where there is a high reliance on imports. For instance oil marketing companies can be avoided, as they have to import oil and sell at prices which are not commercially viable. Avoid companies which have huge foreign borrowings.
Remember that FIIs (Foreign Institutional Investors – Foreign professional investors) who invest in equities and debts have sold a huge chuck of their portfolio recently. This is a negative aspect but if you see this happening to a company/stock which is fundamentally strong you can hold instead of panicking. Long term investors who aim for high returns should use these opportunities to buy good brands and companies at attractive levels.
If you or your kid has taken a loan for studies abroad, you will see a significant impact now, but things can calm down in future.
For instance if you borrowed $40,000 for education loan, which is disbursed in 4 installments (in each semester). Lets assume this is for a 2-year (4 semester) master’s degree which most people opt for.
Assume that you have paid the first installment of $10,000 at an exchange rate of Rs.54 per US Dollar. The total cost as on that date comes to Rs.5.4 lakhs. The second installment is due now. Given current exchange rate of say Rs.59.50 per Dollar, the cost of the second semester comes to Rs.5.95 lakhs, which is Rs.55,000 more.
If we assume Rs.59.5 for the entire $40,000 your total cost comes to a whopping Rs.23.8 lakhs. Relax……you are not affected that much due to two reasons – one due to the fact that you paid less in previous installment, and secondly you have time on your side to save and manage future payments. Since you are paying in installments, the currency rates can turn favorable too.
In case your son/daughter is graduating this year, the rupee depreciation can turn in your favor as they will start earning in dollars, and the high conversion will cushion the loan payment. The other good thing is that most banks give some moratorium or grace period (after graduation) for about 6 months to one year for the student to start repayments.
In any case education loans can be seen as a good investment despite the additional costs in the short term.
I know this may sound as if it is not meant for common man or Aam Admi, who cannot even dream of it. However, there are some vacations or packages which are becoming affordable to middle class people. If you are planning to go for a foreign vacation with your family, it might be a good idea to know the exact rupee costs. At Rs.60 to a dollar a $10,000 vacation will cost Rs.6,00,000, almost 10% more compared to the cost at Rs.54 to a dollar (Rs.5,40,000).
What you can do? If you have booked tickets or if you feel confident about spending then go head. If you are not confident and are not able to meet the budgeted costs, then it may be a good idea to postpone it or cancel the idea. Dropping the idea might disappoint you in the short-run but the slowing economy,
slowing rupee will cost more and make the vacation less enjoyable. Alternatively you can opt for cheaper locations/packages or look at domestic travel options. The current off-season time can bring some good deals and discounts.
Utilizing Remittances & Savings Productively
Incoming remittances can fetch more rupees for people sending money home. The higher savings can help your family deal with inflation. But in cases where the savings or amount is substantial you can invest in deposits, stocks, real estate or other options. Ultimately its your hard earned money which should be put to good use, and sound investing can make your money work hard and generate additional income in future.
Deposits are not the best options, but compared to western nations you get higher interest rates. Stocks are the best vehicles for wealth creation, but many non resident Indians seem to ignore this wonderful option. If you identify good companies and invest for the long term you create a passive dividend income and scope for capital appreciation.
Finally, real estate which has been a well known investment avenue historically is a good option provided you have more funds at your disposal and patience to wait for it to fetch returns. Indian abroad mostly think of having one property for their family as well as one for themselves if they were to settle down in India. The idea is justified and practically makes sense.
However, if you are not living in a property (say second or third property) you must wisely rent it out to generate regular income. Tough the rents might appear like pittance initially, it could even exceed your EMIs (loan payments) over the long run. After retirement the rental income can serve as a wonderful passive income generating vehicle, which can also be passed on to the next generation.
Even if prices of global oil and commodities decline, the Indian consumers might not benefit as rupee depreciation will negate the impact. The depreciating rupee will add further pressure on the overall domestic inflation and since India is structurally an import intensive country, as reflected in the high and persistent current account deficits month after month, the domestic costs will rise on account of rupee depreciation.
Currency rates definitely have an impact on our lives, and they cannot be ignored. Most people assume it only affects people sending their kids abroad, but that’s not fully true. It affects most people in varying degrees. If you can observe these trends and know how to use it to your advantage, you can make gains or even minimize your losses if the trends are not in your favor.
One of the simplest strategies to counter the situation is to start having some contingency funds (worth 3 months expenses) in bank or in short term deposits. Further, you can also prioritize or reduce certain discretionary expenses, for laying a strong financial foundation. I hope you found this write-up on rupee depreciation useful. Please share your comments, suggestions or ideas.