What would happen if rupee crosses 100-mark against US dollar?

Congress MP Rahul Gandhi launched a scathing attack on Prime Minister Narendra Modi over the falling Indian currency against the US dollar. The Indian rupee fell to its worst-ever 80/dollar briefly on Friday, sending a shockwave across financial circles. On Saturday, the rupee was trading just shy of 80 against the dollar. The senior Congress leader, in a Hindi Facebook post, implied that the rupee was on its way to 100. “80, 90, full hundred… For the first time in history, the rupee has crossed 80, its weakest position against the US dollar,” he said, describing the government as directionless. Referring to Modi’s attacks when the rupee had crossed the 60-mark during the UPA regime, Gandhi said,” The PM had said a ‘strong PM is necessary for the strengthening of the rupee’. The reality of that phrase is in front of everyone today,” he said. The Wayanad MP said the government must be jolted from its ‘Kumbhakaran sleep’, and it must bring about economic reforms immediately to revive the flagging economy. The big question is: What would happen if the rupee crosses the 100-mark?

The rupee at the 80-mark against the US dollar isn’t an ideal situation already. But if it reaches 100 in the near future, it would massively hit the country’s foreign reserves and even its wealth. It would mainly hit the price of imports. All that we buy from abroad would become more expensive. In simple terms, consider buying a smartphone. If the company has been selling it at 100 dollars per unit, at the rate of Rs 80, the price of the smartphone would be Rs 8,000. If the rupee reaches the 100-mark, consumers in India would have to pay a whopping Rs 10,000 for the same product. This is a direct loss of 20 percent to the Indian customer. At the country level, this would amount to a massive economic emergency.

The falling rupee would immediately impact the importers. However, exporters stand to gain as they would receive more money. If the rupee reaches the 100-mark, it would also impact the fuel bills. Since India imports most of the required crude oil, the prices of petrol and diesel would increase sharply. This would also have a cascading inflation effect on other goods as well because the cost of transporting goods and services would increase. This would mean a rise in inflation. The government’s subsidy bill would also increase.

Apart from fuel, electronic items, coal, cooking oil, machine components, fertilizers, gold, and even steel would get dearer. This is because the importers are required to pay in dollars. To do that, they need to buy dollars. If the dollar is more expensive, it would add to the cost, which would be ultimately passed on to the customer. Cars and mobile phones would also become more expensive.

Foreign education and foreign travel would also get expensive. However, foreign remittances would increase as the amount of money the Indian diaspora sends home would increase.

To control inflation, the Reserve Bank of India would increase the repo rate and the reserve repo rate. This would be done to reduce the amount of money in the market. The banks would be discouraged to give more loans to people, reducing the purchasing power of the economy. The reduced purchasing power would mean a reduced demand. Reduced demand would help control inflation. The Reserve Bank has increased the policy rates in the past and it is expected to raise them again as inflation is at an alarming level.

Gold rates will also be increased to discourage people from buying the commodity.

It is highly unlikely that the rupee would reach 100 in the near future. But when it happens, the government would have to counteract it by increasing the country’s exports and decreasing its imports.