Impact of weak Indian rupee on the Economy

FPJ BureauUpdated: Tuesday, December 13, 2022, 04:57 PM IST
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Impact of weak Indian rupee on the Economy /Representative image |

By R K Mohapatra

Rising inflationary pressure across the globe, continuous foreign Institutional Investors (FII) selling, and the rupee depreciating to an all-time low has turned investors' sentiments negative towards the capital market.

Geopolitical tensions arising from Russia's invasion of Ukraine have resulted in rising commodity prices across the globe and put pressure on the domestic currency. The cost of all imported materials has gone up. Subsequently, the corporate margin decreased due to increased raw material or import costs. On the other hand, the corporate will enhance the price of the product in order to maintain profitability. Inflation will go up due to a rise in product prices; as a result, the country's growth will decline, and unemployment will rise.

We may call it a multi-level cause-and-effect relationship due to currency devaluations. The durable consumer companies are battling many problems: high commodity costs, Covid-induced lockdowns in China, and a depreciating Indian Rupee. It will further push up the import cost and shrink the margin. On the other hand, the cost of working capital of the durable manufacturing companies increases because of the rising interest rates, which also induces them to increase product prices. Ultimately, we, the general public, pay the higher prices of the same product due to currency devaluation and supply-demand mismatch.

During the persistent depreciation of the rupee against the US $, the small exporter will be adversely affected due to volatility and further currency weakness. Any strength of the Rupee Vis-à-vis Dollar, the forward contract made by the exporter will lose. However, the small exporter is unable to sustain this loss. Although a weaker currency bodes well for exports, that does not apply to all the export units.

What type of relationship is it? Every action is related to good and bad cause and effect; one should understand it. You have to understand the economy in line with the Government and the Central Bank(RBI) policies. The rising interest rate by the Central bank constrained economic growth, which has caused the short-term recession and adverse effects in the long run on all economic parameters. People of Srilanka suffer a lot due to the non-availability of food grains, only due to the Government's ban on all chemical fertilizers in 2021, resulting in drastically cutting crop production in the country. 

In this scenario, people have to be cautious while investing in fixed instruments as well as equity. Stock-specific approach and short-term Fixed deposits are beneficial during the rising interest rate era and volatile market.

rk.mohapatra.as@gmail.com

The author is a blogger, speaker, writer, Social Activist, and Award-winning bestselling Author.

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