Uncontrolled outbreak of coronavirus in pandemic mode has created an unprecedented extreme disorder. On one hand it has challenged the healthcare system of even the most developed nations and on the other it has created mayhem in all sectors of economy. Markets have been left clueless and investors’ wealth is fast dwindling. And pillars of financial system have been pushed on a time bomb. There is extreme fear among investors, big or small, who now fear for their hard earned money. The fear has even percolated down to the spine of a common man who stands confused while forced to fight twin battle – first for his survival against the deadly infection and simultaneously to sustain financially amid lockdown. Precisely, the precarious situation paints a bleak economic future even if the virus onslaught is neutralized.
When we talk of financial system, our financial institutions and even their regulators were facing credibility issues much before the advent of this deadly virus on the scene. The outbreak of the virus exposed the loopholes which the financial system is loaded with. The pandemic also eroded the strength of markets as fear gripped investors and they started leaving the investment arena. In other words, the stock markets at the moment have become most unstable investment avenues and investors are gripped in chaos as substantial portion of their wealth stands either at risk or already eroded.
A case in point is Franklin Templeton India Mutual Fund fiasco. Last week, investors got a shock of their life when Franklin Templeton India Mutual Fund suddenly announced it was winding up six debt schemes that held more than Rs 27,000 crore. The Fund is now neither accepting fresh subscriptions, nor allowing exit. It will liquidate the portfolio as and when the debt papers mature, or earlier if it can sell. Whatever it collects, it will return to investors. How much will that be? No one knows. Investors are simply trapped. Those who had put in money in these schemes are genuinely a worried lot as their hard earned money is at stake.
One of the most unstable features of the markets has been the falling INR against US dollar. Notably, INR is the International Organization for Standardization currency code for the Indian rupee.In the context of present mayhem, let’s have a close look at the falling rupee as it is having a huge impact on common man’s finances.
While writing this column on Tuesday morning, the Indian rupee opened 8 paise down at 76.32 against dollar. Last week, the rupee had crossed 77 per USD for the first time amid strong demand for safe havens and concerns about a severe recession. Analysts forecast that the rupee may hit 80 a dollar over next few months. Selloff in equities is a major threat for rupee going forward. FPIs own $378 billion ( Rs.2,900,000crore) of Indian equities. Year to date, the rupee is down over 7% against the US dollar after foreign investors withdrew a record sum of over Rs.1 lakh crore from theIndian capital markets in March, though the selling has slowed this month. According to Bloomberg Economics the rupee may drop another 4.7% to 80.6 per dollar by June end amid capital outflows.
Now the main question is about the impact of falling value of rupee against USD.The US dollar has been the global benchmark for currencies in all other countries. How weak or strong a particular country’s economy is doing can be gauged by the exchange rate of its exchange rate against the US dollar. Even as there are many strong currencies, the US dollar remains the benchmark against which all currencies are judged, including the Indian rupee.
Let’s have a look at the journey of rupee against dollar. When India became independent in 1947, a rupee was equivalent to just 1 US dollar. In mid-sixties, the rupee was devalued and one US dollar was equivalent to 7.5 Indian rupees. After 50 years of independence, the rupee had fallen to about 65 against the US dollar. Today in April 2020, the rupee has plumbed record depths against the US dollar and breached the 77 marks just few days ago.
The appreciation of the US dollar against INR is common man’s irony and a joy for few only. The falling rupee is making a serious dent on individual finances. Its depreciation is putting huge pressure on the inflation with essential and other imports getting costlier.
From essential commodities to the ritzy gadgets, the depreciating rupee is hurting us in many ways. On one hand, our domestic budgets have been squeezed by high inflation and on the other continuing rupee fall have made crude oil, fertilisers, medicines and iron ore, which India imports in large quantities, costlier.
For an entrepreneur or a manufacturer who banks on imports in terms of raw material, machinery etc. will face the heat. His cost of imports will abruptly go up. This means his production costs will increase and will strain his profitability. The increase in cost of production due to falling rupee is passed on to the customers, which translates into price hike in goods.
The falling rupee also brings miseries on health front. Over a period of time, we have observed a trend developing very fast where people prefer quality treatment of their diseases and bank upon more on imported medicines. So, those undergoing treatment at a hospital and medicines they are taking are imported from a different country, the cost of their treatment and medication will go up.
Those who have gone abroad for 3-4 or more years to complete an educational course are hit badly. The two biggest components of the expenses of such students are tuition fees and the living expenses. Both these would need more Indian rupees when the rupees witnesses a free fall. The problem with these expenses is that they cannot be deferred and usually involve the last date.
According to a data, there are over 7.50 lakh students studying abroad. An Indian student, who paid fees at the exchange rate of around Rs.65 per dollar in 2017, might end up paying around over 77 per dollar this year. Considering that an Indian student spends about $50,000 a year on tuition and hostel facility on average, this could mean an additional spending of Rs. 6 lakh.
Most of the students have taken loans to fund their foreign degree. Education loans are usually in rupees, but as students pay their expenses in a foreign currency, the cost of education and stay has increased. The cost is in a foreign currency while the borrowing is in rupees.So, the students may fall short of funds as the loan would have been taken according to the initial requirements. These additional expenses have been not less than a tsunami for the parents as this weakening of rupee was unseen by them.
Financial experts suggest that parents or guardians of these students should not ignore inflation while planning foreign education of their wards. They should ideally go for hedging currency for education-related expenses by transferring money for expenses every quarter rather than sending it all at once. This way they can average out the price. Even, if the expenses are known in advance, they can buy the rupee-US dollar futures contract and match the expiry date to the date when money is needed.
Meanwhile, a weak rupee influences petrol and diesel prices, as we are dependent on import of crude oil. Fuel has a direct bearing on the cost of transportation. This means the prices of goods transported from one place to another are bound to rise. Ultimately this rising cost of goods has to be borne by the common people as consumers of the products. Fast moving consumer goods like soaps, detergents, deodorants, shampoos too automatically witness price rise whenever dollar gets stronger. So under the circumstances, when INR is losing value against USD, you need to navigate your finances effectively through these rough waters.
(The views are of the author & not the institution he works for)