Uncontrolled outbreak of coronavirus in pandemic mode hascreated an unprecedented extreme disorder. On one hand it has challenged thehealthcare system of even the most developed nations and on the other it has createdmayhem in all sectors of economy. Markets have been left clueless andinvestors’ wealth is fast dwindling. And pillars of financial system have beenpushed on a time bomb. There is extreme fear among investors, big or small, whonow fear for their hard earned money. The fear has even percolated down to thespine of a common man who stands confused while forced to fight twin battle –first for his survival against the deadly infection and simultaneously tosustain financially amid lockdown. Precisely, the precarious situation paints ableak economic future even if the virus onslaught is neutralized.
When we talk of financial system, our financial institutionsand even their regulators were facing credibility issues much before the adventof this deadly virus on the scene. The outbreak of the virus exposed theloopholes which the financial system is loaded with. The pandemic also erodedthe strength of markets as fear gripped investors and they started leaving theinvestment arena. In other words, the stock markets at the moment have becomemost unstable investment avenues and investors are gripped in chaos assubstantial 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 IndiaMutual Fund suddenly announced it was winding up six debt schemes that heldmore than Rs 27,000 crore. The Fund is now neither accepting freshsubscriptions, nor allowing exit. It will liquidate the portfolio as and whenthe debt papers mature, or earlier if it can sell. Whatever it collects, itwill return to investors. How much will that be? No one knows. Investors aresimply trapped. Those who had put in money in these schemes are genuinely a worriedlot as their hard earned money is at stake.
One of the most unstable features of the markets has beenthe falling INR against US dollar. Notably, INR is the InternationalOrganization for Standardization currency code for the Indian rupee.In thecontext of present mayhem, let’s have a close look at the falling rupee as itis having a huge impact on common man’s finances.
While writing this column on Tuesday morning, the Indianrupee opened 8 paise down at 76.32 against dollar. Last week, the rupee hadcrossed 77 per USD for the first time amid strong demand for safe havens andconcerns about a severe recession. Analysts forecast that the rupee mayhit 80 a dollar over next few months. Selloff in equities is a major threat forrupee going forward. FPIs own $378 billion ( Rs.2,900,000crore) of Indianequities. Year to date, the rupee is down over 7% against the US dollar afterforeign investors withdrew a record sum of over Rs.1 lakh crore from theIndiancapital markets in March, though the selling has slowed this month. Accordingto Bloomberg Economics the rupee may drop another 4.7% to 80.6 per dollar byJune end amid capital outflows.
Now the main question is about the impact of falling valueof rupee against USD.The US dollar has been the global benchmark for currenciesin all other countries. How weak or strong a particular country’s economy isdoing can be gauged by the exchange rate of its exchange rate against the USdollar. Even as there are many strong currencies, the US dollar remains thebenchmark 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 USdollar. In mid-sixties, the rupee was devalued and one US dollar was equivalentto 7.5 Indian rupees. After 50 years of independence, the rupee had fallen toabout 65 against the US dollar. Today in April 2020, the rupee has plumbed recorddepths against the US dollar and breached the 77 marks just few days ago.
The appreciation of the US dollar against INR is commonman’s irony and a joy for few only. The falling rupee is making a serious denton individual finances. Its depreciation is putting huge pressure on theinflation with essential and other imports getting costlier.
From essential commodities to the ritzy gadgets, thedepreciating rupee is hurting us in many ways. On one hand, our domesticbudgets have been squeezed by high inflation and on the other continuing rupeefall have made crude oil, fertilisers, medicines and iron ore, which Indiaimports in large quantities, costlier.
For an entrepreneur or a manufacturer who banks on importsin terms of raw material, machinery etc. will face the heat. His cost ofimports will abruptly go up. This means his production costs will increase andwill strain his profitability. The increase in cost of production due tofalling rupee is passed on to the customers, which translates into price hikein goods.
The falling rupee also brings miseries on health front. Overa period of time, we have observed a trend developing very fast where peopleprefer quality treatment of their diseases and bank upon more on importedmedicines. So, those undergoing treatment at a hospital and medicines they aretaking are imported from a different country, the cost of their treatment andmedication will go up.
Those who have gone abroad for 3-4 or more years to completean educational course are hit badly. The two biggest components of the expensesof such students are tuition fees and the living expenses. Both these wouldneed more Indian rupees when the rupees witnesses a freefall. The problem with these expenses is that they cannot be deferred andusually involve the last date.
According to a data, there are over 7.50 lakh studentsstudying abroad. An Indian student, who paid fees at the exchange rate ofaround Rs.65 per dollar in 2017, might end up paying around over 77per dollar this year. Considering that an Indian student spends about $50,000 ayear on tuition and hostel facility on average, this could mean an additionalspending of Rs. 6 lakh.
Most of the students have taken loans to fund their foreigndegree. Education loans are usually in rupees, but as students pay theirexpenses 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, thestudents may fall short of funds as the loan would have been taken according tothe initial requirements. These additional expenses have been not less than atsunami for the parents as this weakening of rupee was unseen by them.
Financial experts suggest that parents or guardians of thesestudents should not ignore inflation while planning foreign education of theirwards. They should ideally go for hedging currency for education-relatedexpenses by transferring money for expenses every quarter rather than sendingit all at once. This way they can average out the price. Even, if the expensesare known in advance, they can buy the rupee-US dollar futures contract andmatch 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 costof transportation. This means the prices of goods transported from one place toanother are bound to rise. Ultimately this rising cost of goods has to be borneby the common people as consumers of the products. Fast moving consumer goodslike soaps, detergents, deodorants, shampoos too automatically witness pricerise whenever dollar gets stronger. So under the circumstances, when INR islosing value against USD, you need to navigate your finances effectivelythrough these rough waters.
(The views are of the author & not the institution he works for)