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Currency Inflation

As you may have read that most of the world is going through a dramatic increase in inflation leading to aggressive action by governments and central banks. But it is not only the supply chain or the war to blame there is another hidden reason that is becoming firmer that is Currency valuations.

To simplify the concept, let us look at an example of India importing crude oil. Today the average price of one barrel is around $121. This means the import bill with no change in currency value would only account for the impact of crude price change but in real life, this is not the case. The Indian Rupee has depreciated almost three percent in the last few months, the steepest in recent times. This would mean the import bill would be INR 9438 per barrel as compared to INR 9148 per barrel if the currency was stable.

This might be a small amount of change but imagine this on millions of barrels that are imported every day and imagine this impact on all the imports that a country does especially the daily essentials that is unavoidable.

Though India is much better off in controlling this part of the reason for inflation till now. Many other countries are not that lucky such as Turkey, and Egypt, and the most surprising to all is Japan.

The Japanese Yen has depreciated from 121 to 133 against the USD in the last three to four months. This acceleration occurred post the new government announced stimulus measures even after inflation rose to decades high of above 1%. Just to emphasise, one of the largest and oldest candy makers increased the price of its bestseller after forty years.

The problem with this driver of inflation is that it is unlikely to provide and respite or reversal. And the market of currencies is the most interlinked as an impact of one-country results in an impact on a weaker one with a much stronger and longer pain.


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