Rocket ride of Dollar value to Rupee is said to have crossed the ‘psychological level’ of Rs.80. How is anything happening anywhere on earth impact your psychology and so your budget for the day?
Out of all the factors the depreciation of rupee seen today is due to increase in demand for dollars. Two main reasons contributing to this are high rates by US Federal bank (Causes reduction in dollar circulation) and Russia-Ukraine war (supply volatility causing price rise of dollar denominated goods).
Impact of the dollar story on you and me:
Costlier imports increases the cost of production. Increase in cost of production in turn increases the price. This is how inflation comes into picture. For instance, India imports 80% of its crude oil requirements. Increase in global crude oil prices increases the demand for dollars thereby depreciating currencies like rupee. Costly import of crude oil pushes the petroleum price up. Consequently the transportation costs increases. As a result price rise in vegetables and so in products from food based industries (E.g. tomato sauce) could be witnessed.
Not paying more, then you might get less
Those goods whose price rise is not so significant are into shrinkflation. That is reducing the quantity of the product instead of increasing its price. Next time remember to keep track of your chocolate bar size.
Planning to take loans?
So the day started with depreciating rupee causing inflation (or her twin Shrinkflation) ending up in higher interest rates. The Central bank follows a tighter monetary policy by increasing the interest rates with a view of reducing the money supply in the market. Theoretically decrease in money supply decreases spending. Now for you and me borrowing money from financial institutions becomes expensive. However for those with savings account you might earn little more due to increased interest rates on deposits.
Not so bad
Though depreciating currency and inflation are not always bad their positive impacts are not really direct. Depreciating currency could improve exports since other countries can now buy more with less dollars. Stronger fundamentals of domestic economy (like production level, employment rate) nevertheless immune to global volatility so let’s just fasten the seat belts.