 The rupee has taken a nosedive against the dollar from about 70 rupees to a dollar that we had all got used to It is now almost 83 rupees to a dollar a massive massive drop Which has a huge impact on India's economy now you'd ask why because after all a rupee is a rupee inside Indian you'd say that you know I'm not going out. I don't need dollars. Why should I care? Well, you need to care because everything that is not made in India everything that is imported becomes more expensive when the rupee tanks again, you might say I believe in buying made in India products I don't need imported goods. There's one thing that you cannot escape, which is crude oil 85% of whatever we consume in India in terms of crude oil is imported only 15% is Produced domestically and it not only affects the price of petrol diesel LPG Cooking gas which directly come out of crude, but it also affects the price of all plastics Which are also byproducts of crude it affects the price of paints rubber everything Which is somewhat dependent on crude and when the price of petrol and diesel go up It not only affects fuel prices It also affects the prices of everything in the economy including food you'll ask why food Well, there are three key reasons one is that farmers consume a lot of the diesel that is consumed in India about 13% or one-eighth of all the diesel consumed is consumed by farmers where they run Diesel generated pump sets to irrigate their fields. They run tractors harvesters many other things which depend on diesel and Fertilizer prices are indirectly affected by crude. You know why because Fertilizer one of the key fertilizers comes from natural gas It is produced from natural gas and natural gas prices move in tandem with crude prices in any case About half the natural gas that we consume is imported So when the rupee falls natural grasses prices also rise which means that fertilizers prices rise And the third key reason is for food to move from the farm to the table It has to be transported and most of that comes in trucks and Trucking costs go up when diesel prices go up So crude prices make a huge difference to food prices. In fact when trucking costs go up Transport costs for every good in the economy goes up So everything becomes more expensive and any service where conveyance costs are an important part of that service That becomes more expensive and petrol prices go up So the fact is that when the rupee slides the impact on crude prices alone causes wide spread Generalized inflation in the economy and what is the way in which that inflation is tackled first? Let's look at individual entrepreneurs. What do they do when input costs go up They try to pass it on to consumers in terms of higher retail prices But what happens when prices go up some people can no longer afford those goods So the demand for that good drops the only way to keep that demand more or less stable is for companies to absorb Some of those higher input costs themselves, but that would affect their profit margins How can they ensure that they'd absorb the input costs the costs of raw materials partly But also not affect their profit margins They can only do that by cutting wages of workers or even sacking a few of them and making the remaining work harder So invariably the weight of inflation always falls on the working people the poor Who are the least likely to be able to bear that burden? They are affected the most This is how inflation is tackled by the average capitalist But when it comes to the macro level when it comes to the entire economy Who is tasked with controlling inflation the Reserve Bank of India the RBI whose main Remit is to tackle inflation and how does the RBI tackle this slide in the rupee and the Inflation that is caused by that slide the first thing it does is that it tries to prop up the rupee by Selling dollars that it holds because the RBI holds a certain amount of dollars in its foreign exchange reserves when it sells Dollars it increases the supply of dollars temporarily and therefore its price reduces in effect The rupee gets propped up its trendings temporarily But there is a limit to that because the RBI needs that foreign exchange reserve to finance our imports And already in the past 13 months for various reasons our foreign exchange reserves have gone down by 17% So the RBI cannot continue to Sell dollars to increase its supply to be able to prop up the rupee another way It does it is by increasing interest rates by increasing interest rates The RBI makes India a little bit more attractive to foreign investors Especially when the US Fed has already increased interest rates in America by 3 percentage points since January this year alone There's another reason why the RBI has to raise interest rates when it can't tackle the rupee slide because it has to control inflation How does it do that when interest rates go down corporates borrow more to invest more to hire more people to produce more and increase the supply of goods in the economy and They increase the overall production level growth goes up again, not just corporates You and I also borrow when interest rates are low not only to buy big things like homes and cars But even to convert our purchases into EMI's because if the interest rate is low we expect that okay It's worth buying this even if I don't hold the money right now So one way to cool down both Investment and consumer demand is to increase interest rates, but there's a trade-off there when you increase interest rates What happens the economy slows down growth slows down and that is bad news for a country like India where growth has been pretty dismal At least it's been much lower than what has been expected and there's a double whammy here Foreign investors just don't bring in their money to because the interest rates are high in a particular country They bring in money chasing growth and when growth slows down They go away and that is when they take their dollars away and sell their rupee and the rupee Loses its value. So the rupee weakens further. This is a vicious cycle where the rupee's value goes down It sets off a chain of events which makes the rupee weaken further The only way to stop this is to go back to the old days of capital controls of trade controls But that isn't going to happen in this completely new liberal dogmatic atmosphere That's the show today. Keep watching news click subscribe to us Do share this video comment and like it as well