By Admin 
The war between America and Iran shook the economies around the world. This has had a direct and rapid impact on the prices of crude oil, which are skyrocketing. Expensive oil weakened the Indian rupee. Amidst all this, the Indian government has appealed to the people to avoid buying gold, save fuel and postpone foreign trips. Now the biggest question is, what impact will this entire incident have on your everyday life and what will happen to your EMI in the coming days? To know the answers to all these questions, ABP News spoke to financial expert and chartered accountant Vikas Kumar Tiwari. Come, let us understand the complete account in his own words…
Question 1: How much impact will the rising prices of petrol and diesel have on the common man’s pocket?
Expert opinion: Its impact is very deep and will spread everywhere. The increase in the prices of petrol and diesel decided by the government will not be limited to the fuel of your vehicle only. In fact, petrol and diesel becoming expensive means that transportation of everything that reaches you by road will become expensive – be it vegetables, milk or any grocery item.
For a common man, even a minor increase in fuel prices can mess up his entire month’s budget. Those who go to office in their private vehicles, their commuting expenses will directly increase. At the same time, fares for public transport like auto or bus are also almost certain to increase. The worst impact of this increased cost will be on middle class and poor families, because a large part of their income is already spent on food and transportation. Now they will have less money left for savings or other things.
However, how long this effect will last will depend on two things:
- For how long do crude oil prices remain stable in the international market?
- Does the government try to reduce this burden by taking steps like tax relief or subsidy?
At present, this increase will reduce your spending power and weaken the demand in the market.
Question 2: What impact will the increase in retail inflation have on people’s spending and the overall market?
Expert opinion: When the prices of things increase, it does not just mean that you have to pay more money to the shopkeeper. This is a big sign that the cost of living is continuously increasing throughout the economy. Wholesale inflation, which reflects the cost of raw materials and production, sooner or later turns into retail inflation. The result is that people’s purchasing power reduces and they are forced to change their spending habits.
If seen at the domestic level, rising inflation means that we will have to spend more on food, electricity, hospital expenses and everyday items. As essential items become more expensive, people will start spending less on non-essential items like entertainment, eating out or buying a new car. This has a direct impact on the demand in the market and sales may decrease in many sectors.
From the market perspective, this persistently high inflation creates an environment of uncertainty for businessmen and investors. Companies whose work is more dependent on fuel, transport and imported raw materials, their profits reduce due to increase in their costs. Apart from this, if inflation remains high for a long time, then there is an expectation that the Reserve Bank of India (RBI) may increase interest rates. When interest rates rise, it becomes expensive for both companies and the common man to take loans, which can slow down economic growth. Although some sectors like oil and commodities may make profits in the short run due to high prices, this situation is not good for the entire economy.
Question 3: Will the rupee benefit from the Prime Minister’s appeal?
Expert opinion: If a large number of people and institutions follow PM Modi’s appeal, it can definitely have a positive impact on the Indian rupee. The mathematics behind this is very simple. India is the largest importer of gold and crude oil in the world. When we buy these things, we have to pay to foreign countries in US dollars. Due to this, the demand for dollars increases and our foreign exchange reserves decrease, due to which the rupee weakens.
If people reduce the purchase of gold, postpone going on foreign trips and reduce the consumption of petrol and diesel by working from home, then it will directly mean that our import bill is reducing. When imports decrease, demand for dollars will also decrease. This will control the current account deficit of the country and will reduce the pressure on the rupee. Apart from this, this appeal also gives a message that the country is trying to face economic challenges responsibly. This increases the confidence of investors and the rupee also benefits from it.
But, it is important to understand that all these are only short term measures. Appeals alone will not suffice to keep the rupee strong in the long run. This will require major economic reforms, strong exports, stable foreign investment, controlled inflation and a balanced financial management.
Question 4: If the rupee continues to weaken, what effect will it have on normal life?
Expert opinion: Continuous fall of rupee means double hit on your pocket. India imports about 90% of its requirement of crude oil, a lot of electronic goods, machinery and chemicals from outside. All this is paid in dollars. When the rupee becomes weak, we have to pay more money to buy these things. As a result inflation increases.
Its first and biggest impact is visible on the prices of petrol and diesel. Expensive fuel makes transportation expensive, which increases the price of every product including food items. Apart from this, things like your mobile phone, laptop, medicines and car will also become expensive. For those families whose children are studying abroad, the fees and living expenses will suddenly increase a lot.
Similarly, the problems of companies which have dollar debt will increase. However, there is also an advantage. Exporting companies like IT, pharma and textiles benefit from the weak rupee because the dollar payments they receive from abroad become worth more in rupees. Government and RBI have 6 big weapons to stop the fall of rupee:
- You can sell dollars by intervening in the foreign exchange market.
- Interest rates can be increased to attract foreign investment.
- Can discourage non-essential imports.
- To promote manufacturing in the country under initiatives like ‘Self-reliant India’.
- To control inflation and fiscal deficit.
- Reducing dependence on oil imports by increasing renewable energy.
Question 5: Should RBI increase the repo rate in the June MPC meeting or keep it as it is?
Expert opinion: The biggest challenge before the RBI at this time is to take a decision which will control inflation and also maintain the pace of economic growth. In view of the huge surge in wholesale inflation and economic uncertainties around the world, there is every possibility of RBI adopting a cautious approach.
If the repo rate is increased, it will reduce liquidity in the market and loans will become expensive. This will reduce the purchasing power of people and decrease in demand can help in controlling inflation. Higher interest rates will also attract foreign investors, which will support the rupee. But, its disadvantage will be that the EMI of your home loan, car loan and business loan will increase. It will become expensive for companies to take new loans, which may put a brake on investment and employment opportunities.
On the other hand, if RBI does not make any changes in the rates, it will continue to boost economic growth. This will be a relief for those sectors which are already struggling with rising costs and weak demand. At present, the inflation that has increased is mainly due to supply side reasons, such as oil prices. In such a situation, the root of the problem cannot be addressed just by increasing interest rates.
The best strategy is to create a balance. If inflation remains high for a long time and poses a threat to the economy, it may be necessary to increase the repo rate to a limited extent. But, if RBI feels that this inflation is temporary and due to external reasons, then it can adopt a policy of keeping a close watch on the situation by maintaining the current rates. Overall, the RBI’s decision will be an attempt to strike a fine balance between these four things – control of inflation, stability of the rupee, market confidence and pace of economic growth.