What is the impact of the depreciating rupee on the stock market ?
As on 18th July 2022 , the rupee has depreciated to a record 79.88 against the USD implying that rupee has become less valuable and weaker against the dollar. But the question arises how does this fall is impacting our Indian stock market. Let’s understand what is currency depreciation?
Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies. Currency depreciation can occur due to factors such as economic fundamentals, interest rate differentials, political instability, or risk aversion among investors.
WHY THE RUPEE IS FALLING?
The reasons behind the rupee falling are many. In these recent times , the rupee has been constantly falling because of major outflows in foreign capital.
A currency falls or rises due to simple demand and supply. India’s imports exceed its exports by $13.4 billion. This results in less demand of the INR.
Other reasons such as inflation, emergencies also lead to weakening currency. Since the fall of rupee , there has been heavy selling and pulling out of money by FIIs (Foreign Institutional Investors).FIIs have sold more than Rs 1.5 lakh crore of equities so far in 2022, this has resulted in a more bigger fall. FII’s prefer to liquidate their investment and invest in dollar denominated stocks or in countries with a stronger currency.
WHAT IS THE IMPACT OF FALL IN RUPEE?
- INFLATION: When a currency falls in terms of USD, then it leads to inflation as imports become expensive and prices rise. India imports crude oil heavily (around 85%) and thus, rupee depreciation makes the country’s oil imports expensive, again increasing the pressure on the rupee. As oil is a basic commodity that greases the wheels of the economy, it leads to increase in prices of goods and materials directly related to petrochemicals or indirectly by higher fuel prices in transport of goods.
- VOLATILITY IN STOCK MARKETS: Whenever there is a news regarding a fall in rupee , the markets become unpredictable and a lot of movement is recorded.Many companies importing raw material, capital intensive sectors, crude oil will hurt the most. This will directly impact the business of listed Indian companies in stock market and hence the prices of shares.
- INCREASE IN EXPORTS: As rupee becomes cheaper for the foreign countries , it leads to rise in exports as the foreigners save metal, pharma sectors focus heavily on exports and hence, they will witness a heavy spike in their revenues comparatively.
- DECREASE OF FOREX RESERVES: When the rupee falls , RBI combats it by selling dollar , which leads to a decrease in the forex reserves.
- EXPENSIVE BUSINESS AND FRANCHISE ROYALTY- Businesses like Jubliant foods (popular brand Dominos India) and Page Industries (popular brand Jockey India) who hold franchises of international companies also have to pay their royalties in terms of US dollars.Hence, directly impacting their operational costs and business.
IMPACT OF FALL IN RUPEE ON STOCK MARKET AND ITS CORRELATION
There is a direct correlation between the value of rupee and the impact on stock markets, but this not necessarily be true all the time.
For example , Nifty Index has rose up by 867 points (5.65%) since last month, the main reason behind this is that the large cap companies sometimes are less affected by the fall of rupee.Though mid cap and small cap companies are impacted severely in comparison to large cap.
MAJOR SECTORAL CHANGES TO LOOK OUT FOR
1. INFORMATION TECHNOLOGY- In India , major IT companies earn their revenue through foreign clients i.e in dollars , so here the rupee fall increases their revenue and profits.
Major stocks to look out for in this Sector :
Infosys
Wipro
HCL Tech
Redington
2. TEA SECTOR- India exports nearly 230 million kg of teas, or around 16% of what it produces, to countries like Russia, Iran, the US, the UK, Germany, Japan, Poland. As we are the second biggest exporter of tea , major tea companies will see a rise in profits as the rupee falls.
Major stocks to look out for in this Sector :
Tata Consumer Products
Godrej Industries Limited
Hindustan Unilever
3. OIL AND GAS– This sector gets negatively impacted as oil and gas is mainly imported in India . Hence procurement costs will increase for these companies. This is mainly because , these companies import commodities , and when rupee falls then imports become expensive.But at the same time, crude oil prices are increasing due to global tension, hence this positive impact may neutralise the rupee depreciation impact.
Major stocks to look out for in this Sector :
Indian Oil Corporation
Oil and Natural Gas Corporation Ltd
4. PHARMA– One of the most famous sectors of the stock market showed an uptrend mainly due to its export volumes. Pharma companies export a lot of their products and the rupee fall benefits them
Major stocks to look out for in this Sector :
Sun Pharmaceuticals Industries Limited
Cipla Ltd
Lupin Ltd
These are just examples. Mainly those sectors who are either export oriented(positive) or import oriented(negative) will be hurt the most due to this depreciating factor.
WHAT WE SHOULD DO AS A STOCK MARKET INVESTOR / TRADER
As an investor , it’s important to check our portfolio for any stocks which might hamper our return. This can be done by looking at the above sectors and identifying which ones are safe and which ones are risky. We can check annual report of any company from each sector to decide which one is more dependent on imports(risky or uncertain) and which company earns more in dollars i.e. export oriented(safe).
Moreover, here diversification plays an important role. Your investments in the Indian stock market are in rupees. However, when you invest overseas (in the US stock markets) it is in dollars. You first convert your money into USD to invest and then back to INR when you redeem it. When the rupee depreciates against the dollar, it effectively means an additional return on your US investments. Hence, diversifying your portfolio in US Stock markets atleast for 5 percent is necessary.
As a trader , its important to check the volatility in the market , right now the markets are unpredictable and its very risky to trade in such conditions, we can either wait for the market to be stable and keep monitoring exisiting trading portfolio.
Dont consider any stock as a recommendation. Do your own research before investing.