Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian Rupee: What's the buzz? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 7, 2006

    Indian Rupee: What's the buzz?

    The Indian Rupee has been largely volatile since May 2004 until now, trading in a wide range between 43.2 and 46.3. A host of factors viz., rising crude prices, widening trade deficit and international currency trends, have governed the movement of the Indian currency during this period. In this article, we shall take a look at what drives the Indian currency and the impact of the same on sectors.

    Factors affecting the Rupee

    Global currency trends: It must be noted that appreciation or depreciation of the Rupee, as the case may be, is more influenced by the strength or weakness of the US Dollar. Which means that factors affecting the dollar against a host of other international currencies need to be closely monitored. Global currency trends are largely affected by the string of economic reports released by the US and Euro regions, statements made by the central banks in these regions, inflationary concerns and the GDP growth of these economies. It must be noted that the appreciation of the Rupee to 43.50 levels in the latter half of 2004, was largely attributed to the weakness of the dollar against major currencies such as the Euro and the Yen and the positive sentiment on the back of the Yuan revaluation.

    Capital flows and the Indian stock market: The movement of capital into Indian papers (debt and equity) also plays a dominant role in determining the exchange rate. It must be noted that, in the past couple of years, despite the trade deficit, Rupee has been appreciating largely due to money being poured into Indian equities by FIIs. Recently, the Fed rate hike and the outflow of money by the Foreign Institutional Investors (FIIs) have not only impacted the Indian stock markets but also the Indian currency unit.

    Oil imports: Considering that India imports around 70% of the oil that it consumes, the impact of the same on the Indian currency assumes significant importance. Crude prices have been soaring to new heights and is consequently inflating India's oil import bill. Typically the Rupee is under considerable pressure at the end of every month as oil importers look to meet their payment obligations. This is because oil firms step up the demand for dollars, thus exerting downward pressure on the Rupee.

    RBI intervention: It must be noted that in comparison to currencies like the Dollar and the Euro, which are determined by market movements, the Indian Rupee is 'partially managed' by the RBI. The 'Balance of Payments' crisis in the early 1990s, wherein the Rupee was 'devalued' is a case in point. The RBI has also, off and on, intervened in the Indian currency market, when the Rupee has exhibited signs of extreme volatility. For example, towards the end of 2004, when the Euro and the Asian currencies such as the Japanese Yen appreciated sharply against the US Dollar, it was the Reserve Bank of India (RBI) intervention that kept the Rupee from appreciating at a steep pace.

    Political factors: Political instability, besides affecting the economy, affects the financial markets as well. A case in point to be noted is the elections in May 2004, when the Congress came into power. While the impact of the same on the stockmarkets is a well-documented fact, the Rupee was also largely affected by the same and as a result depreciated to 46 per US Dollar levels.

    Impact on sectors...

    While it is an almost impossible task in predicting the movement of the Rupee, considering the variables that impact the same, the impact of currency movement on the Indian economy and industry cannot be undermined. For example, the depreciation of the Rupee could further magnify the value of oil imports, as oil firms will now have to buy dollars at a much expensive rate. This in turn is likely to negatively impact the already widening trade deficit. That said, sectors focusing largely on exports such as software, pharma and textiles would benefit immensely from a depreciating Rupee. For example, a 1% change in the US Dollar rate affects the operating margins of the software sector by around 30 basis points. At the end of the day, while it is not easy to completely eliminate forex risks, it all boils down to what prudent risk management measures companies are adopting to hedge against the same.



    Equitymaster requests your view! Post a comment on "Indian Rupee: What's the buzz?". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Which Gods Will Bring Down the US Empire? (Vivek Kaul's Diary)

    Aug 17, 2017

    Mr Trump is in the White House and the gods are in their heavens; what's not to like?

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 12:11 PM