Weakening of Rupee will spur inflation

The Indian currency, rupee, has been weakening against the US dollar for the past few months. However, on 21st June 2013, the Indian rupee hit a record low of 59.93 against the US dollar. If the value of rupee keeps deteriorating, as witnessed in the past few weeks and months, there is a possibility that the country will face an era of inflation.

 

Efforts are being undertaken by the Indian government to keep inflation at bay and to enhance economic growth. But sadly, in light of the depreciating rupee, manufacturers are likely to increase the prices of their goods.

 

In fact, automobile giants like Toyota and General Motors have declared that they might increase the prices of cars sold in India. According to the Deputy Managing Director and Chief Operating Officer of Toyota Kirloskar Motors, Sandeep Singh, the fall of the rupee will increase the cost of 50 percent of the parts imported by the company. Honda too recently increased the prices of the cars in the country due to an increase in the cost of production.

 

The rate at which the rupee is weakening is alarming and shocking and has raised eyebrows on all fronts. Due to currency depreciation, the government will be forced to increase the price of fuel even further.

 

On 15th June 2013, the price of petrol rose by Rs 2 per litre (excluding local sales tax). This is the second time in the month that the price of petrol has increased. There is a high probability that the price of local gold will increase, in comparison to international prices, which may prompt many people to invest in this yellow metal despite government’s efforts to dissuade people from purchasing gold. 

 

Indian students planning to go to foreign universities for further studies may find it difficult to raise funds as overseas education will become expensive in light of the weakening rupee. 

 

Overseas travel will also be affected adversely and it will become more expensive for Indians to travel to foreign lands. Although the currencies of several emerging economies have weakened against the US dollar, experts and economists predict that India will suffer the most because it has the largest current account deficit, amounting to Rp 4,744 billion (US$ 80 billion), after the US.

 

The sustained weakening of the rupee, as observed in June 2013, can be traced back to the widening current account deficit of the country, investors’ lack of confidence in the growth of the country, and the lack of commitment by government officials on economic reforms. 

 

So far, the Reserve Bank of India has decided to leave the interest rates unchanged, increasing the probability of inflation. Other countries in the region that are facing similar problems, including Indonesia, have raised their interest rates to support their respective currencies.

 

However, the Reserve Bank of India seems to be indifferent to the economic pressures and it has left its policy repo rate unchanged at 7.25 percent. The Reserve Bank of India claims that its efforts are not directed at curbing short term inflation rates but at curbing long term inflation rates.

 

Only time will tell if the Reserve Bank of India’s policies will be effective in improving the economic condition of India. Till then, as economists and experts predict, India is sure to be enveloped in inflation in months to come due to the weakening of the Indian currency.

 

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