Will the falling rupee hurt your investments?
In this issue:
» India's cash deficit set to worsen?
» India does not need any economic stimulus
» Basel III could trigger a recession
» Chinese steelmakers to enter India
» ...and more!
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00:00 | Chart of the day | |
The answer is yes. A falling rupee has a direct impact on your investments. Allow us to explain how this happens. When the value of rupee falls, there are two things that happen. First is that the exports from the country become more attractive to global consumers. This means that the exports should go up. When this happens, it is good because the income of the country and hence its GDP goes up. But what happens if the global demand itself is depressed? Well this is exactly what happened with India. The demand from the developed world especially from US and Europe, which are the biggest markets for Indian goods, was depressed during the whole of last year. And it still continues to be depressed. As a result exports remained tepid.
The second impact of the falling rupee is on the imports. Companies that import their raw materials and key items, end up seeing their costs go up. Now during happier times, these companies are able to pass on the increase in costs to their customers. But in times like the ones we are living in right now, domestic demand too continues to be depressed. High inflation as well as high interest rates are some reasons for the same. So when domestic demand is low, these companies find it difficult if not impossible to pass on the increase in costs to the customers. As a result they end up taking a hit on their margins.
The same concept applies to inflation as well. If the rupee devalues, then the country's import bill, particularly its oil bill, goes up. That means that the very dear fuel costs spiral upwards and end up fuelling the inflation in the country. This inflation has its own adverse impact on the investments by depressing the companies' profit margins as well as leading to monetary tightening. If inflation does remain stubbornly high then the Reserve Bank Of India (RBI) may find it difficult to rollback the interest rates which in turn would mean that liquidity remains tight. And capital investments get deferred.
All in all, the falling rupee would have an adverse impact on the investments. Now the question that would come to your mind is what should an investor do? The investors need to do their homework before investing. Identifying companies that have a resilient business model is the need of the hour. And the company has to have pricing power for its goods or services. To add to this if it has fully integrated manufacturing facilities then it would remain insulated from high import related costs to a large extent. Investing in such companies at the right valuations is the key to long term investment gains.
Do you think the falling rupee could hurt your investments? Share your comments with us or post your views on our Facebook page / Google+ page.
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Source: Trent |
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02:20 | ![]() | |
02:50 | ![]() | |
We couldn't have agreed more. As per us, what fiscal stimulus ends up doing is that it encourages spending. But savings and the resultant investments is what improves the potential output of an economy. Thus, what is needed is proper execution of existing projects and continuous stream of savings so that the supply side scenario can be improved. Fiscal stimulus is not the answer according to us.
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The Indian stock markets were down 3.2% for the week. This was the fourth straight weekly loss as indices lost ground due to contraction in the industrial production data. It may be noted that the industrial output contracted 3.5% in March. Clarification on General Anti Avoidance Rule and RBI directive to exporters to convert 50% of their forex holdings into rupee did not help much in improving market sentiments.
Amongst, the other world markets, Hong Kong was the biggest loser (down by 5.3%) followed by Japan (down by 4.6%). The markets in France and UK were relatively flat registering a fall of 1% and 1.4% respectively.
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Source: Yahoo Finance, Kitco, Cnfm |
04:55 | Today's Investing mantra |
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2 Responses to "Will the falling rupee hurt your investments?"
Chandrasekaran
May 12, 2012Dear Sir,
This an Excellent analysis & by this if our Govt. wakes up & do the right things to arrest the fall of rupee then at least in the future nation may come out of the grips which are slowing down the whole scenario of our nation`s Growth.
K.J. Mohata
May 23, 2012Very good analysis. RBI needs to act fast to arrest Re. slide, otherwise it will have spiraling effect on many things.As it is we are all worried with high inflation. Govt. needs to urgently do the things.