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Is the weak currency good or bad for Indian stocks?

Author: Kumar Shankar Roy/Wednesday, May 16, 2018/Categories: Currency

Is the weak currency good or bad for Indian stocks?

The Indian rupee has been flirting with new lows every other day against the US dollar. Like a hapless plumber fixing a new leak everytime opens a new pipe, the domestic currency has had a shocking run and is trading near 67-68 levels. In fact, the INR has been amongst the worst performing amongst major currencies. A weaker rupee is likely to increase in import costs, albeit with a lagged effect on the Indian economy. On the other hand, IT stocks, pharma firms and a bunch of exporters benefit from a weak rupee. 

The rupee has generally been joined at the hip with the USD dollar index over the years. The weakness in the dollar is a clear reflection of the prospects of the US economy. From a classical economic viewpoint, a weaker rupee means broadly three-four major things. First, a weaker domestic currency can lead to lower aggregate consumption. Second, a weaker rupee drag corporate margins lower. Remember, India Inc.'s margins expanded when commodity prices fell. Third, a weak rupee also lends some upward bias to inflation. We are not talking about just oil, but there is some agri-related impact as well. Fourth, a weak rupee also opens the door for higher fiscal stresses for the government. 

Given the historical correlation of a weak rupee and markets, stock market investors make some obvious trades. They will start preferring exporters like IT and select auto names. The weak rupee's anticipated impact on agri-inflation also compels many investors to look at rural income-linked businesses. Some cut exposure to discretionary businesses, given the margin-related pressures that may emanate. 

The rupee’s movement has not dented domestic markets at all. In fact, India is nonetheless up 5% from recent lows. There has been a perceptible swing in banking related concerns. The near-term stock performance is being driven by earnings feats, as investors focus less on growth.

There is also a feeling in Indian markets that the central bank may do something with interest rates if the rupee continues to depreciate. If the pressure on the currency intensifies, odds for a move in June’s review will rise. Policymakers are likely to monitor the scale of the increase in minimum support prices, updated monsoon forecasts, and oil price direction in the coming months as well.

Coming back to exporters, it is important to have a nuanced view of the weak-rupee effect. The rupee alone will not provide much comfort to the export sector. Definitely, it will be one of the factors and its impact will vary from sector to sector. 

Stock investors must remember that in import-intensive sectors like gems and jewellery, petroleum, electronic hardware or high-end engineering, corporates have a natural hedge. Hence, the rupee depreciation is more or less nullified. But in the traditional sectors like handicraft, carpets, sports goods, marine products, textiles, and footwear, there are gainers. This is because these sectors are less import sensitive.

For Indian investors, the new fiscal has brought with itself a new set of headwinds for the economy. What started off as a reaction to global trade wars, foreign portfolio outflows post Budget, and high trade deficit prints, soon turned into a broad-based weakness led by surging oil prices, fiscal uncertainties, and risks of higher inflation. Now, there is a rupee worry too.

But positioning equity portfolios with the rupee at 67 vs dollar level may be too early right now. Many experts continue to believe that the recent weakness in the rupee is getting amplified by the developments in the global space. Hence, there would be some respite in store in the medium term supporting a retracement of the rupee to a level closer to 66 to the US Dollar by Q2FY19.

Stay light on your feet and invest cautiously.

The author is a business journalist with 13 years of experience

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