Indian Rupee: What's the buzz? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Indian Rupee: What's the buzz?

Jun 7, 2006

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

Top 5 Recent IPO Developments You Should Know (Views On News)

May 12, 2021

So far in 2021, IPOs in India have raised nearly US$ 3 bn, the best start to the year since 2018.

How Did Mindtree Perform in Q4FY21? (Company Info)

Apr 20, 2021

Here's the rundown on the company's latest quarterly results.

5 Big IPOs to Look Forward to in 2021 (Views On News)

Jun 19, 2021

A peak into the hype around the IPOs of internet companies like Zomato and Paytm

HDFC Banking and Financial Services Fund: Emphasizes on the Growing Sector (Outside View)

Jun 18, 2021

PersonalFN analyses the features of HDFC Banking and Financial Services Fund and explains the potential this fund has to offer to its investors.

Can You Make More than 100 Times Your Investment? (Profit Hunter)

Jun 18, 2021

The open secret to multiplying your money in forever stocks.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 18, 2021 (Close)