Jun 9, 2000|
Indian Rupee and the Stock Market
Is there any correlation between the Indian Rupee and the domestic stocks markets? Yes, there is. That domestic markets have not responded to the recent depreciation in the value of the Rupee is altogether a different matter.
Depreciation in the value of the Rupee affects, at the macro economy level, among other things the inflation rate, country's external debt servicing costs and current account. At the company level, affects depend on the exposure of the firm to foreign currency debt and international trade markets (for sourcing raw materials and selling finished goods and services). Given these implications, how come the markets fail to react to depreciation in the value of the Indian Rupee? The Indian Rupee, as we know, has been on a downslide for sometime now.
Depreciation of a currency affects adversely the inflation rate in an economy, as we have to pay more Rupees for every US Dollar worth of good we import. This results in a rise in prices of imported products, which affect the general price level. For example if the Rupee price for crude (or any other input) were to increase, almost all industries would suffer inflation in costs. This would then result in higher prices as firms try to mitigate the hike in expenses to protect margins.
Similar would be the case in the case of external debt, which currently stands just short of US$ 100 bn. The losses here would be on two counts - higher interest burden and inflation in the total value of debt (in terms of Rupees). Just to put this in perspective, 5% depreciation in the value of the Rupee would increase servicing costs by Rs 12 bn per annum (assuming an average interest rate of 6%) and the repayment amount by Rs 200 bn.
On the current account, since we run only a marginal deficit, we would not be effected much. Exports of goods and services would earn more Rupees for every US Dollar worth of goods they sell. Exporters would also become more competitive in international markets as they would command be able to out price their competitors. In case of imports, especially oil and capital goods (this would hit investment activity), Rupee costs would rise.
On the company front the effect would be more specific (apart from the factors effecting the macro economy). For example a software company, say Infosys, would be a net beneficiary as it is a net earner of foreign exchange. Similarly, for a company, which has a large uncovered external debt, the effect could be drastic.
The recent depreciation in the value of the Rupee has failed to effect stock prices. The markets have been preoccupied with their obsession with NASDAQ and flow of FII money. But this preoccupation is more temporary, given that key economic variables have altered dramatically in recent weeks. But then as Paul Krugman, a noted economist said, "it's is just one of the things the markets do now and then; and it, too, shall pass".
More Views on News
Jul 25, 2017
Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?
May 27, 2017
What happens when minority shareholders are short-changed in the normal course of business?
Feb 15, 2017
PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.
Aug 24, 2016
And here's your chance to claim a free copy of this book...
Aug 12, 2016
And Why India's demographic dividend could turn out to be a doubtful debt...
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407