The Indian rupee in the global economic market continues to drop against US dollar since January 2018. Market analysts call Indian rupee overvalued and predict that it may reach up to Rs 70 per dollar, possibly, by the next year.
Indian rupee is losing its value and becoming one of the weaker currencies in foreign exchange markets. Such a volatility is the result of an increase in oil imports as well as hike in crude oil prices, which made the US dollar stronger than ever. Not only this, the significant rise in US bond yields since the past one year with around 82 basis points (bps) has increased the overall demand of the US dollar.
Notably, the current US bond yield is more than 3 percent.
Thus, more investors are being lured to US treasuries weakening the currencies of emerging markets weaker; Indian currency is one of them.
However, according to currency analysts, the Indian yields are higher if compared to other nations in the market, but the attrition in the market value of Indian rupee is the reason why Indian yields are not attracting a lot of investors.
The current market condition is further intensified as RBI’s monetary policy committee recently announced to increase the key repo rate by 25 basis points to 6.25 percent.
Although it was expected in August rather than in June. Taking the increasing inflation and oil prices in the account, we might get to see another 25 bps hike within this year. However, the committee is somewhat sure that the economic growth of the country will not be affected by the key repo rate hike.
On the other hand, the ongoing trade war, domestic food inflation, and sloppy foreign investment are to continue bringing the value of Indian rupee.
Against this backdrop, how this fall in Indian rupee is going to impact their investments became the main concern of the investors.
The drop in rupee is bound to keep bond yields higher and enable the authorities to increase the interest rates. Higher the interest rates, more is the attractiveness of the bonds to foreign capital.
But, as the interest rates increase, the Net Asset Value (NAV) and the returns on long-term debt funds may go down. Not only can this, but the impact of higher interest also be seen on the government bond schemes in NPS.
Concerning the common man of India, higher home loan EMIs, medical compensation, and costly foreign education and travel expenses might let him down.
How to mitigate impact of weak Rupee?
People who will bear the major brunt of currency devaluation are foreign travelers, students studying abroad, and Indian patients taking treatment/health services from foreign hospitals. Though the impact of weaker Rupee is evident on these groups, a more strategic spending can reduce the impact on their expenditure.
Let us follow some suggestions one by one…
To cut short the foreign travel expenses, the tour operators consider it a smart choice for Indians to book the tour and pay early the total costs involved, including the forex component. The forex component covers accommodation, meals, sight-seeing, and other perks other than simply the ticket bookings. Many prefer paying the forex component later on, and a few pay the complete package in advance. By following the latter one, one can definitely save costs during the foreign travel. Further, reducing the number of excursions, days to be spent, and carrying pre-paid travel cards help a great deal.
The students living abroad do not get any leverage on the tuition fees. At times, the tuition fees must be paid before the commencement of semester in many universities. And, the drop in rupee is surely a trouble for them. Therefore, they can pay the complete fee of the program whenever the exchange rate goes down. The students aspiring to study abroad should first look for the scholarships and part-time jobs to balance their fee and expenses. They can also opt for suitable education loans which increase the loan amount per semester with the increase in the semester fees. ISIC cards, specifically made for the students, can be availed when traveling and shopping at the stores.
Medical insurance is a necessity as a slight hike in the costs of medicines or consumables will put a dent on patients’ pocket. In hospitals, the costs of AC, flooring, and other facilities may increase due to the drop in the rupee. This, too, shall be added to the patient’s bill. Going abroad for medical treatment again requires a hefty amount of money. Health and Medical insurance bought as soon as possible is an intelligent move.
(Author is the Founder & CEO, Finway Capital, a non-banking financial company – NBFC)