Explained: Impact of Fall in Rupee Dollar Exchange Rate: The Indian rupee has reached its lowest level ever. The price of one dollar has crossed Rs 85. On Thursday, December 19, the price of Indian currency opened at Rs 85.04 per dollar, which is lower than the previous day’s level of Rs 84.96. Signals from the US Federal Reserve have further accelerated this decline. The Federal Reserve has indicated to slow down the pace of cutting its interest rates, due to which the dollar has strengthened. This is a major reason for the record fall in the rupee. In such a situation, the big question before investors is what adjustments they should make in their investment strategy in the current environment. We will discuss this question further, but first let us understand what is the reason for the latest fall in the rupee and what could be its impact.
Effect of Federal Reserve’s stance
The US Federal Reserve on Wednesday announced reducing its benchmark interest rate by 0.25% to the target range of 4.25%-4.5%. Along with this, it has also expressed the possibility of reducing the rates only twice in 2025. After this announcement, the dollar index reached 108.086, which is the highest level in the last two years. Other factors putting pressure on the rupee include capital outflow from domestic equity markets, aggressive policy of the US Fed and weakness of Asian currencies, especially the Chinese yuan.
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Reduction in foreign exchange reserves a challenge for RBI
The continuous fall of the rupee may be a cause for concern for the Reserve Bank (RBI). To prevent the rupee from falling further, the RBI has had to intervene repeatedly in the currency market during the last few months, due to which there has been a sharp decline in India’s foreign exchange reserves. Between October 4 and December 6, 2024, RBI’s foreign exchange reserves declined from $704.885 billion to $654.857 billion. Therefore, in the coming time, RBI will also have to worry about increasing the foreign exchange reserves, especially in those circumstances when the possibility of increasing political and economic instability at the international level cannot be ruled out.
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Impact of rupee weakness on you
The fall in rupee has a direct impact on the cost of imported goods. Apart from directly imported products, this also includes raw materials or parts used in the manufacturing of a product. For example, to import a product worth $100, if you had to pay Rs 8,300 a year ago, now you will have to pay Rs 8,500. Its impact can be felt on every aspect, from your budget to investments.
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How will inflation be affected?
The dollar becoming expensive also has a direct impact on the crude oil imported from outside. If oil prices have to be increased due to this, then the cost of transportation increases, due to which there is a danger of increasing the prices of all essential commodities. This means that this fall in rupee can spoil your household budget in future.
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Cost of foreign education and traveling will increase
If you are planning to study or travel abroad, your expenses will also increase due to the expensive dollar. Weakness of rupee means that you will have to spend more money for the same service or goods.
What will be the impact on which business?
For businesses that depend on imports, rising costs may put pressure on profitability. But this situation can also prove beneficial for exporters. For sectors like IT, Pharma, and Gems and Jewellery, the weakness of rupee can provide a new opportunity to profit in business.
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Domestic market will also be affected
This may have a negative impact on the domestic stock market, because investors may shift from rupee based investments to dollar based investments. However, those investing in American stocks may benefit from the strength of the dollar.
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What should investors do in the current environment?
To avoid the ill effects of rupee weakness, investors should make changes in their portfolio. For this, by changing the investment strategy, we can focus on increasing investment in export oriented sectors like IT and Pharma. Also, one should invest in those big companies which have the ability to withstand exchange rate fluctuations better. Overall, the rupee’s depreciation could bring both new economic opportunities and challenges. It is important that investors take a long-term view without panic and adjust their financial planning according to the new economic environment.
