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Indian Rupee and the Stock Market - Views on News from Equitymaster
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  • 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".



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