Recently, you might have noticed a gradual increase in the prices of everyday items like fuel, groceries, or even cab fares. This rise is largely due to the depreciation of the Indian rupee. The rupee’s decline in value against the US dollar, driven by heightened demand for the dollar, affects not only the broader economy but also impacts your personal finances.
Since 2014, the rupee has depreciated by around 25%. This decline is influenced by a combination of factors including inflation, slow economic growth, and notably, the sharp rise in crude oil prices following the Ukraine–Russia war. As a major importer of goods and raw materials, India feels the impact of this depreciation acutely.
India imports a wide range of products, from electronic appliances and edible oil to iron and steel, much of which is paid for in dollars. When the dollar strengthens, these imports become more expensive. Consequently, manufacturers pass these increased costs on to consumers. This is why you might see higher prices for items such as phones, laptops, and even luxury vehicles, as the cost of components rises.
The ripple effect of a depreciating rupee also extends to personal finances. For example, rising fuel prices can increase the cost of distributing and retailing consumer goods, thereby affecting monthly budgets and reducing purchasing power. Fuel inflation, in particular, influences the demand for bio-fuels and grains, which leads to higher food prices reflected in your grocery bill.
Additionally, the depreciation of the rupee often leads to higher interest rates on EMIs. To combat inflation, the Reserve Bank of India (RBI) may raise the repo rate—the interest rate at which it lends to commercial banks. As of August 2022, the repo rate had increased by 50 basis points, resulting in higher lending rates. This affects those with personal loans or who pay their credit card bills in installments.
Important Points
- Impact on Imports: The rupee’s depreciation makes imports more expensive, which increases the cost of goods like electronics and luxury items.
- Rising Fuel Prices: Higher fuel prices lead to increased distribution and retail costs, affecting overall consumer spending and budgeting.
- Effect on Food Prices: Fuel inflation can drive up the prices of bio-fuels and grains, impacting grocery bills.
- Increased Interest Rates: The depreciation of the rupee can lead to higher interest rates on loans and credit card EMIs due to increased repo rates by the RBI.
Despite the challenges posed by a depreciating rupee, you can take steps to manage its impact on your finances. Regularly reviewing your financial portfolio helps you gauge returns in current market conditions. Investing in companies with substantial foreign export dealings, such as those in the FMCG, IT, automotive, or pharmaceutical sectors, can offer some protection against currency fluctuations. Maintaining a diversified portfolio and keeping detailed records of past investments can aid in better financial planning and stability, even in a volatile currency environment.
