Cost of crashing currency: How a falling Indian rupee can hit costs, pay, jobs

Aug 19 2013, 18:57 IST
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Over time, the depreciation will hit the common man in a number of ways. (Reuters) Over time, the depreciation will hit the common man in a number of ways. (Reuters)
SummaryOver time, the depreciation will hit the common man in a number of ways.

A fall in the value of the Indian rupee vs the US dollar has a cascading impact that is not restricted just to the super-rich or exporters and importers. Over time, the depreciation will hit the common man in a number of ways - costs, pay, jobs.

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For a country like India, which imports more goods and services that it can export out, a depreciating currency means higher prices of a number of daily consumption products. That’s a double whammy to the man on the street, who has already been reeling under the impact of double-digit consumer-level inflation for the last three years. A weak rupee means costlier crude oil, pulses, edible oil, fertiliser, medicine, iron ore and coal, all of which India imports in substantial quantities. Though not all of these are daily consumption items, variations in their prices have an indirect effect on household finances.

Related: Nine steps India can take to prevent rupee slide

Transported goods

Take, for example, crude oil. A weak rupee will lead to higher import prices. Since petrol is fully and diesel partialy decontrolled, oil marketing companies such as IOC and BPCL are free to hike their retail prices in tandem with the import-linked prices. Once the prices of both fuels increase progressively at the filling stations, it is followed by a cascading impact that is manifested in the form of an increase in transportation costs, leading to higher prices of goods that are transported from one part of the country to another, such as food, consumer durables and fast-moving consumer goods.

Related: The rupee's value, determined offshore by a market that never sleeps

Automobiles

Among the sectors that would potentially take the biggest hit is automobiles, one of India’s largest manufacturing segments and a big employer. The impact of the falling rupee is likely to be three-pronged. As most automobile companies import components, they will have to hike costs of two-wheelers and cars. Some of these companies, including all those foreign-owned, will have to pay a higher royalty to parent firms. A pressure on margins could also mean firms being forced to cut down production, implying salary cuts and possible retrenchment.

Imported Parts

Manufacturers of consumer goods such as soaps, detergents and shampoos, where vegetable oil is a key ingredient, would need to hike prices as

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