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What happens to your money when Rupee falls – India Today

News headlines often tell us about the Rupee’s value dropping to a new all-time low against the US dollar. This basically means that one has to spend even more in terms of India’s currency to buy US dollars. On Monday, the exchange rate broke the Rs 77 barrier.

Suppose we avoid the temptation of getting into the slugfest between the two sections defending and criticising the central government for the slide. In that case, we can address a crucial citizen-centric question: what happens to our money every time the Rupee falls?

But before we get there, it may help to address some other questions. One may ask: why is the Rupee’s value determined against the US Dollar’s and why can’t any other country’s currency be the benchmark?

THE DOLLAR BENCHMARK

The US Dollar has become the global currency. Both the US Dollar and the Euro are popular and accepted in international markets. The US Dollar’s share of foreign currencies in international banks is more than 64 per cent. For the Euro, it’s about 20 per cent. The US Dollar reflects the strength of America’s economy.

In 85 per cent of international trade, including crude oil, the US Dollar is involved. About 40 per cent of loans globally are sanctioned in dollars. On the other hand, the 180-odd other currencies in the world are mostly used within their countries.

Read: Rupee hits record low against US dollar, 2nd time this week

This leads us to two more questions: Why has the US Dollar always been stronger than the Rupee—just rewind to the time when you started following the news—and why has the gap been widening?

THE WIDENING GAP

When a commodity’s demand is high, its value will be more. Our imports from the US are more than what we export there. The dollars we get from the US are less than what we need to pay them for their goods. We need to buy more dollars from banks that represent a small unit in the vast foreign exchange market. This is how the superiority got established, and the gap kept widening.

THE CURRENT TRIGGER

The Ukraine war is a significant factor in the Rupee’s decline. Russia is the world’s second-biggest crude oil exporter. Naturally, supplies have been disrupted and prices spiked. And India is hit hard as it’s the world’s third-largest oil consumer behind the US and China.

But there are also other factors that weaken the Rupee. After the US, China is our biggest trade partner. Stringent lockdowns across various Chinese cities have badly affected economic activity there. India is naturally bearing the brunt.

The Rupee also falls when foreign portfolio investors pull out money from the stock and bond markets. This time they are doing it because of the global uncertainties caused by Ukraine’s invasion by Russia. Also, the strengthening of the Dollar in line with expectations of better growth in the US economy has pressured the Rupee.

Then, we all complain about the price rise. Prices rise when there are not enough goods, leading to a demand-supply gap. Or when money is in greater supply in the economy, but we cannot get what we want. This reduces the purchasing power of our currency.

Read: Three reasons why Rupee is falling against Dollar

IMPACT ON YOU

You may think you have or are earning the same amount of money before the last depreciation in the Rupee’s value. So, you can buy the identical amounts of goods or services as before. Nothing has changed, right? It does not work like that. Let’s unpack this. First, look at a prominent factor that’s weakening our currency and also affecting us, even though indirectly.

High crude oil prices not only mean costlier petrol and diesel for private vehicle owners, but transportation of essential commodities, including fruits, vegetables, edible oil and foodgrains, also costs more. All this leads to inflation, and a depletion of our forex reserves because we’re sending out more dollars on crude oil. This reduces our ability to import other goods that we need. As we’re an import-oriented country, this leads to fewer and costlier foreign goods, and a further weakening of the Rupee. If you shop, you spend more.

Here is what the latest numbers say. India’s retail inflation based on the consumer price index (CPI) jumped to an 8-year high of 7.79 per cent in April, data released by the government showed on Thursday. Inflation numbers have now been above the upper limit of the RBI’s 2 per cent to 6 per cent tolerance band for four straight months. On the other hand, the country’s foreign exchange reserves declined by USD 28.05 billion to USD 607.31 billion at the end of March this year from USD 635.36 billion at the end of September 2021, according to an RBI report.

If you hold back spending, this causes demand for goods and services to go down – activities like construction, manufacturing and imports slow. Companies can hire fewer employees. The overall economy takes a hit. You feel the pinch of the Rupee’s slide.

Less workforce and machinery will be needed. The government will have a reduced capacity to spend on infrastructure building and other welfare projects. Investment goes down. This deepens the jobs crisis. And we know that it’s the common citizens who are hit the most.

A falling Rupee also makes your overseas education and travel costlier because your fees and tickets cost more in line with the Dollar value.

WHO DECIDES VALUE?

But who exactly decides the Rupee’s value? Is it the Indian government? The US? No one in particular really does.

Foreign currency exchange rates are floating and depend on daily market factors like demand and supply, with zero or little intervention from the countries involved. The more the demand, the greater the value.
For example, heavy imports, which mean more dollars purchased, decrease the value of our currency. Similarly, in the case of heavy exports, more dollars will flow into India and become cheaper for us to buy through the Rupee. Currency transactions take place in the foreign exchange market that was mentioned earlier in the piece.

WHEN SLIDE HELPS

But it’s not all doom and gloom about the Rupee’s depreciation. Non-resident Indians (NRIs), in countries such as the US, the UK or the UAE, can send more money home because of favourable exchange rates. NRIs can also take loans from abroad and invest in India.

On the other hand, a falling Rupee helps exporters receive more rupees in exchange for Dollars. In other words, it gives overseas buyers more purchasing power. But they also have to spend more by way of higher production and processing charges due to expensive imported raw materials like petroleum products, gems and jewellery, electronics and pharmaceuticals.

GOVT’S OPTIONS LIMITED

So, cannot the government do anything when there is a significant fall in the Rupee’s value? It can but the options are limited. The government can try to reverse the Rupee’s low demand by, through state-run banks, buying India’s currency from the market using US dollar reserves that it keeps. More dollars in circulation means lower value. Fewer rupees in circulation mean higher value.

But this may also backfire. When the government empties its forex reserves, it won’t be able to import all of the necessary goods that people and industry need. This will lead to a price rise and pinch us all. We saw how inflation weakens the currency. So, it’s a vicious cycle.

The other option is, that the Reserve Bank of India (RBI) could increase the rate at which it lends money to banks. A higher interest rate will mean more investors buy government bonds and interest-rate products because of higher returns. The Rupee will be in greater demand and its value will increase.

Similarly, when the US increases interest rates, investors from other countries flock there and the Dollar strengthens. But those taking housing, car and other loans will be negatively affected because they will be paying back more.

Read: Rupee hits new low against dollar | Top points

WHY NOT PRINT MORE?

Finally, a question that some may ask: why cannot the government print more currency? This is because when the government prints money to meet its needs without the economy growing at the same pace, it can lead to a disaster. More money will spike the demand for goods and services. They will become scarce or rare. Hyper-inflation will spiral. And your currency notes and coins won’t be able to buy anything.

We saw what happened in Zimbabwe.

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Market Watcher: Rand gains ground – Moneyweb

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Global shares trade lower as inflation worries cloud outlook – The Zimbabwe Mail

A currency trader talks on the phone at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Thursday, Feb. 24, 2022. Asian stock markets followed Wall Street lower Thursday as anxiety about a possible Russian invasion of Ukraine rose. (AP Photo/Ahn Young-joon)


TOKYO (AP) — Global shares declined Tuesday as worries over inflation tempered optimism over President Joe Biden’s remark that he was considering reducing U.S. tariffs on Chinese imports.

European shares fell in early trading, with France’s CAC 40 down 1.3% at 6,275.73. Germany’s DAX dipped nearly 1.0% to 14,038.93, while Britain’s FTSE 100 shed 0.7% to 7,460.16. The future for the Dow industrials was 0.8% lower while the S&P 500 future slipped 1.3%.

On Monday, the S&P 500 jumped 1.9%, the Dow Jones Industrial Average rose 2% and the Nasdaq climbed 1.6%. The Russell 2000 gained 1.1%.

Biden, who announced a new economic and trade initiative with the region while on a visit to Japan, confirmed to reporters that he planned to discuss the issue of punitive tariffs imposed on China during former President Donald Trump’s administration with Treasury Secretary Janet Yellen once he returns to Washington.

“I’m talking with the secretary when I get home. We are considering it,” Biden said.

The comments raised optimism over the potential for an easing of tensions between the world’s two biggest economies, but not all were convinced.

“Talks of reducing tariffs on China’s exports have surfaced before and the lack of any concrete follow-through remains an element of disappointment for markets,” said Yeap Jun Rong, market strategist at IG in Singapore.

Biden joined leaders of Japan, Australia and India in Tokyo for a summit of the “Quad,” or the Quadrilateral Security Dialogue, where Biden made the case that the world has a shared responsibility to do something to assist Ukrainian resistance against Russia’s aggression. The summit came on the final day of Biden’s first trip to Asia as president.


Investors are keeping an eye on the impact of the war in Ukraine on commodity prices and the possible blow to global economic growth from pandemic lockdowns in China.

Japan’s benchmark Nikkei 225 lost 0.9% to 26,748.14. Australia’s S&P/ASX 200 slipped 0.3% to 7,128.80 and South Korea’s Kospi sank 1.6% to 2,605.87. Hong Kong’s Hang Seng shed 1.8% to 20,112.10, while the Shanghai Composite declined 2.4% to 3,070.93.

Investors fear the U.S. central bank could go too far in raising rates or move too quickly. That could slow business activity and potentially bring on a recession. On Wednesday, investors will get a more detailed glimpse into the Fed’s decision-making process with the release of minutes from the latest policy setting meeting.

Technology shares that gained hugely during the pandemic are now taking the brunt of selling thanks to their hefty prices. Casting a shadow, social media and camera maker Snap Inc. surprised investors with a warning late Monday.

“Snap’s stock price went snap, crackle, pop, as it fell by over 30% in extended trading after the CEO, in a note to employees, said it would miss quarterly guidance on growth and revenues,” Jeffrey Halley of Oanda said in a commentary.

In premarket trading Snap’s shares were down 28% at $22.47 early Tuesday.

Wall Street will get a few economic updates this week from the Commerce Department. On Thursday it will release a report on first-quarter gross domestic product and on Friday it will release data on personal income and spending for April.

In energy trading, U.S. benchmark crude lost 75 cents to $109.54 a barrel in electronic trading on the New York Mercantile Exchange. It added 1 cent to $110.29 per barrel on Monday. Brent crude, the international standard for pricing, fell 83 cents to $112.59 a barrel.

In currency trading, the U.S. dollar edged down to 127.37 Japanese yen from 127.78 yen. The euro cost $1.0717, up from $1.0688.


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RBZ mops up ZW$31,6 billion in four months – New Zimbabwe.com

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By Alois Vinga


THE Reserve Bank of Zimbabwe (RBZ) managed to mop up excess liquidity amounting to ZW$31,6 billion in the last four months of 2021 as the monetary authority upped the gear towards preserving the local currency’s stability.

Excess liquidity/cash position is when the balance exceeds the actual working capital cash needed, thereby becoming excess cash, or cash that is not necessary to the firm’s financial operations unless it is reinvested for other purposes.

The monetary authorities believe that if such balances are not mopped, several companies may be tempted to invade the parallel market and destabilise exchange rates for speculative purposes.

The RBZ has been implementing the excess cash mop up exercise through the issuance of Open Market Operations (OMO) securities through Non-Negotiable-Certificates of Deposits and Savings, which offers banks the opportunity to deposit excess cash with the central bank.

“During the quarter, OMO securities issued by the RBZ rose from ZW$41, 19 billion in the third quarter to ZW$72, 82 billion in December 2021, thus mopping up excess liquidity amounting to ZW$31,63 billion from the market during the quarter under review,” latest RBZ statistics said.

The period also saw reserve money stock stood at ZW$25,5 billion in the fourth quarter of 2021, compared to the target of ZW$28,9 billion, which translated to a quarterly growth of -1.14%, against a targeted growth of 10%.

“The reserve money quarter- on quarter growth target was reduced from 20% to 10%, in the fourth quarter of 2021.The quarterly growth in reserve money was contained within target during the fourth quarter of 2021,” said RBZ.

The lower reserve money stock, in part, reflected liquidity mopping by the Central Bank through open market operations.

“Mopping was largely through issuance of securities (non-negotiable certificates of deposits and savings bonds), supported by the liquidity withdrawing impact of net Government revenue collections and net foreign exchange selling by the Reserve Bank,” the central bank said.

Economic analyst, Prosper Chitambara, said the sustained trend is a step in the right direction, but hinted that deeper reforms are still required if long term benefits are to be achieved.

“The quantum of mopped up excess cash reflects the Monetary Policy stance which the RBZ is pursuing. This will obviously reign in the parallel market exchange rate volatility.

“However, more still needs to be done as far as maintaining money supply growth at sustainable levels if long term economic stability is to be achieved,” he said.

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