Turbulence in South Asian economies, political upheaval and international events such as the Russia-Ukraine war have caused inflation and a drop in the value of the Indian rupee. The Indian rupee has still performed better in these times of turmoil and global inflation issues in comparison to other Asian and European currencies. The government and the Reserve Bank of India have taken precautions and put controls on imports of goods and overseas investments. The rupee’s resilience has proven to be impressive in many ways and efforts to preserve its value are continuing to impact the cost of living in developing countries in South Asia. Without measures to protect the value of the rupee, inflation could have disastrous effects on the working class and impoverished people whose wages can no longer meet the cost of living.

Increasing inflation and poverty rates are inextricably linked. As the prices of basic commodities increase and the value of a currency decreases, vulnerable populations are unable to keep up with the expenses. The rupee’s resilience will be beneficial in keeping the poverty level relatively stable.

Recent Depreciation

The ongoing war in Ukraine and the subsequent market volatility, combined with U.S. Federal Reserve’s actions to tighten monetary policy have drastically impacted the global market in terms of access to imported goods and depreciation of foreign currencies.

During the month of July, the Indian rupee reached an all-time low. Its value has fallen below 80 rupees per $1 USD as of July 19, 2022, equating to a total value fall of 7.1% since January 19, 2022. Other South Asian countries have followed a similar, worsening trend. For example, Sri Lanka’s currency has fallen almost 80% to 362 Sri Lankan rupees per $1 USD in the same time period. This is due to multiple other factors, including political upheaval and bankruptcy, as the country is facing its “worst economic crisis since independence in 1948.” Less drastically, the value of the Pakistani rupee has fallen about 22% to 216 Pakistani rupees per $1 USD.

Considering the large drops in rupee values and increasing U.S. interest rates, the Indian rupee’s resilience has proven impressive. Falling exchange rates have not caused irreversible damage to the domestic currency as Indian investments are still attractive to foreign investors since the U.S. dollar is simultaneously getting stronger and allowing investors to buy more valuable shares. The Indian central bank has made one of its main goals to maintain a sense of stability and prevent market volatility from impacting its emerging economy. With a stable market and prices, vulnerable populations will be able to access food and basic resources with steady wages.

Effects on Cost of Living

Poverty remains a widespread problem in India, with about 176 million Indians living in extreme poverty as of 2015. The country has made progress in lifting itself from these high rates of poverty with action from the government and Reserve Bank of India, especially amid the COVID-19 pandemic. These measures include “monetary and fiscal policy measures,” increased spending on health and social protection and economic decisions relating to imports and trading with foreign countries.

India relies on imports to provide consumers and its market with services and goods and the depreciating rupee and inflation will undoubtedly prove difficult for the working population of India. Worsening depreciation leads to inflation and higher costs for foreign commodities, including imports such as fuel and oil, imported foods and foreign education. This, in turn, decreases the purchasing power of people’s salaries, which is the most hard-hitting for India’s vulnerable working populations.

However, the depreciation of the rupee “can also support India’s exports as our goods and services become cheaper for foreign importers,” India’s CRISIL analytical company said.

Preserving Value

The rupee has been holding its ground against the dollar due to a fall in oil prices as well as efforts by India’s central bank. The Reserve Bank of India (RBI) increased its intervention in the market over the past decade. Currently, it buys an average of $7 billion from the market every month. RBI also announced in July 2022 that it will “allow trade settlements between India and other countries in rupees.”

The Government of India, also known as the Centre, has also taken measures to safeguard the rupee’s resilience to prevent the rupee from further depreciating and impacting consumer markets to an even greater extent. Investments are one of the main focuses in maintaining the value of the rupee against global market uncertainty. The government is considering lowering limits on overseas investments by Indian residents to counteract depreciation and is making efforts to speed up USD remittances that exporters owe. The Centre could also attempt entering a bond index for more securities and inflow to sell back to investors.

Looking Ahead

Minister of Finance and Corporate Affairs Nirmala Sitharaman has shared that inflation is not expected to severely worsen poverty in India as no one will be pushed “below the lower poverty line of $1.9/day, while only 0.02% & 0.04% of the population will go below higher poverty lines of $3.3/day and $5.5/day, respectively.”

The efforts of the government to protect the purchasing power of the rupee are necessary for consumers to continue supporting themselves, especially those that poverty already impacted. In September 2022, Reuters reported that a minimum of 10 Indian states announced [support of more than] 1 trillion rupees ($12.6 billion), mainly in cash transfers and electricity subsidies, for households to combat inflation.”

– Nethya Samarakkodige
Photo: Flickr