Impact of a weaker rupee: The Indian Rupee is weakening against the US Dollar and has crashed to nearly Rs 77.62 from levels of Rs 73.21 a year ago – a drop of around 6%! In other words, the dollar has gained 6% against the rupee over the past year. Since January, the INR has weakened by 4% against the dollar and could continue to show weakness, especially if the US Fed raises interest rates more than expected in 2022.
Simply put, in 2017 you had to shell out Rs 64 to buy a dollar, but now you need Rs 77, reflecting a lower INR. This also shows that the INR has depreciated by almost 3.75% on an annualized basis against the dollar. A stronger rupee means you need less to buy dollars than before.
The fall or weakening of the rupee has a direct and indirect impact on our personal finances in addition to having positive and negative implications for the economy. While exporters stand to gain when the INR drops, with India being largely an importing country, the fallout from a low INR is greater.
Imported goods become expensive
An indirect impact is that certain goods become expensive, which leads to inflation. When the INR weakens, imported goods become expensive, and since India is a major importer of oil, there is a widespread impact on other goods as well. The rise in inflation observed is also partly due to the decline in the INR. Even imported components used in consumer goods are experiencing an increase, which pushes the cost of goods higher.
The cost of borrowing increases
This is also an indirect impact, but your lending EMI is increasing at a time when the INR is weakening. When inflation rises, RBI uses its tools like the repo rate to try to control inflation. With the rise in the repo rate, the interest rates rise, which leads to an increase in the cost of borrowing. Businesses and retail borrowers face higher borrowing costs and higher EMIs than before.
Your education abroad is expensive
Unless you have INR stashed in a foreign account, sending dollars for foreign education will become expensive. Students who are studying abroad should ideally keep dollars in a foreign bank account to protect against lower INR.
Taking your family on an international vacation will become more expensive. When exchanging INR to buy dollars through banks, credit cards, etc., a higher outflow of rupees will be present if the dollar has strengthened.
How to hedge against a weaker rupee
In the long term, the INR has weakened against the dollar and the trend may take time to reverse. Buy US stocks or keep dollars in a foreign bank account if raising children overseas is on your radar. Remittances abroad are governed by the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India (RBI). Under the liberalized remittance program, all residents, including minors, are allowed to freely transfer up to USD 2,50,000 per fiscal year (April to March) for any authorized current account or capital transaction or a combination of both.