Rupee touched 59 to a dollar yesterday and it sent panic waves in investors’ community, bankers, and Government. Investors’ community is worried because it will cut down the returns of foreign institutional investors (FII) which will directly impact overall stock market negatively. Bankers are worried because this may delay RBI’s rate cuts further halting the dream run banks experienced in last couple of months. Government is worried because it will further increase the deficit.
There is one section of people who are possibly impacted more than any of these communities. This community never comes into media or become the concern of economists. The community is students who are trying to secure loan and fund their education abroad. They are the ones who face the impact directly, unlike bankers, investors and Government.
The lure of foreign education
Foreign education is dream of many students from India. The exposure to the wider world, intellectual surroundings, competitive environment, and meritocracy are the factors that drive our youngsters to American or European shore for higher education. However, there is the problem of funding.
In recent times, Government has directed banks to be more liberal in education loan and this has helped students. Even though the loan rates are still higher, there is real chance of getting loan for education abroad. This is a major help.
Impact of depreciation of rupee
When students go for education in foreign countries (let’s take USA), they pay fees and incur expenses in dollars. When rupee goes down, the amount or rupee needed to pay in dollar is more. Hence rupee depreciation adds to your funding requirement.
Let’s look at it this way.
The typical cost of studying in US universities is anywhere between $15,000 and $30,000 per year. This is just the fee. The living expenses are about $15000 in a year. Hence a student has to invest about $30,000 to $50,000 per year for higher education. This is a huge amount. The total course would cost anywhere between $40,000 and $80,000.
Now suppose a student, named Indranil, plans to study in US university and takes loan from banks. He estimates that it will require $40,000 for his entire education. The exchange rate is Rs 50 per USD. Hence he applies for Rs 20 lakhs as education loan. However, by the time, he is about to pay the fee and go to US, the exchange rate changes to Rs 55 per USD. This means, the cost of education is up by 10%. Indranil now will have to pay 22 lakhs. His expenses just went up by 2 lakhs.
Many parents fund their children’s education from their savings. Any depreciation in rupee adds to their woes as they have to dip further in their savings.
The only set of students who will gain from rupee depreciation are those who have already completed their studies and about to begin repaying their loan. For them, depreciation of rupee means fewer dollars to be paid back to the bank.
Options to manage the fall
The first option should be to speak with the bank and ask for further loan. Banks have introduced top-up scheme for education loan where they fill the gap created by the exchange rate fluctuation. Hence in our example, Indranil can get top-up of 2 lakhs from the same bank. This will certainly increase the payback amount but it will help students continue with their studies.
The other option is to wait and watch RBI action on exchange rate. Typically RBI intervenes when the exchange rate goes closer to Rs 60 per USD. This option is fraught with risk though. Every rupee slide has reasons behind it. Sometimes, the reasons are manageable and hence RBI takes action to restore rupee at a certain level. Sometimes, there are structural reasons for the slide. In such cases, even RBI may not have much say.
Conclusion
In recent fall, there have been different voices from the market projecting opposite actions. Some say that rupee may touch 60 and go beyond. In fact, some experts have said that the fall may even touch Rs 70 as this seems to be the right exchange rate given the higher inflation India has been going through for last couple of quarters.
On the other hand, RBI and Finance ministry have sounded optimistic that the fall can be arrested.