Ordinary Indians will feel the impact of the weakening rupee, which hit a record low of 52 to a dollar on Monday, most in terms of high food prices.
India imports a slew of food items, such as pulses and edible oil, to meet domestic demand.
A falling rupee simply makes imports costlier since India now has to pay more, in terms of rupees, for the same goods and services it imports.
According to a Reserve Bank report, a declining rupee and higher minimum support price (MSP) announced last month pose fresh risks to food prices, which remain significantly elevated.
Food inflation eased to 10.63% for the week ending November 5, in contrast to 11.81% the previous week, but economists consider this a mere blip.
“Despite a normal monsoon this year and record production of foodgrains last year, food price inflation may not moderate much in an environment of increase in rural wages, significant increase in MSPs and persistent input cost pressures in the farm sector,” the central bank has said.The rupee has lost over 16% of its value against the dollar so far this year.
“India’s imports account for about 22% of its GDP, and depreciation of the rupee raises the risk of imported inflation,” the RBI report said.
India imports 21% of world’s pulses to meet domestic prices, according to Pravin Dongre, president of the Mumbai-based Indian Pulses & Grains Association.
“Prices of commonly consumed pulses, which have been so far stable, will go up somewhat on the back of a weaker rupee,” Dongre said.
A weak rupee also directly cranks up the government’s fuel expenses, which fans prices of most other goods.
The value of oil imported by India, in dollar terms, has declined since July 2011 owing to a fall in global crude prices. In rupee terms, however, it has increased due to the domestic currency’s depreciation.