5 Ways a Weaker Indian Rupee Benefits You...and Hurts You

The Indian rupee hit a new all-time low against the US dollar today.

The rupee is now within striking distance of the 82 mark to one dollar.

This target of 82 has been predicted by many market gurus for a long time and now it seems it will finally be hit soon.

Should you be concerned? How does the fall in the rupee affect you? And most importantly, is there a way you can profit from it?

First let's look at how the falling rupee hurts you...

#1 Imported Inflation

India is a net importing country. This means import more that we export. As per government data, in financial year 2021-22, India's imports were US$ 610.22 bn and exports were US$ 417.81 bn.

As the US dollar is the world's reserve currency, it's also the world main invoicing currency for goods and services. If the US dollar gets stronger, i.e. the rupee gets weaker, the cost of imports goes up.

This will be the case even if the volume of imports remains the same. This means, all imported goods become more expensive. This is called imported inflation.

The cost of India's big imports - crude oil, natural gas, minerals of all kinds, machinery, electrical equipment, appliances, chemicals - have all gone up significantly. This makes inflation in India, which is already high, harder to control.

#2 Foreign Debt

This may not impact you directly but it does impact companies that have debt denominated in foreign currency.

Thus, if you are an employee, shareholder, supplier or customer of these companies, you will feel an indirect impact.

When debt is denominated in dollars, the principal and interest payments have to be made in dollars. If the rupee weakens against the dollar, as it's doing now, more rupees will be needed to repay the dollar loan.

As per the RBI, India's external debt was US$ 620.7 bn at the end of FY22. It's a large number and it increased by US$ 42.1 bn in one year. And with the dollar rising, corporates with external debt will find it increasingly difficult repay.

#3 Higher Fuel Prices

This is largely a part of imported inflation covered above but it should be pointed out separately due its importance.

India imports more than 80% of its fossil fuel needs. Crude oil is India's biggest import. Thus rising fuel prices impacts us all.

In fact, the rupee starts to come under pressure whenever crude oil prices go up sharply, even if the dollar is not rising.

Recently crude oil prices have been falling and this is good news but the sharp rise to US$ 130/ barrel has done a significant damage to the economy by slowing down growth and contributing to high inflation.

#4 Falling Stock Prices

As a net importing nation, it logically follows that most companies listed on the stock market are dependent on imports in some way. This takes the form of crude oil and input commodities.

As the rupee falls, corporate India ends up paying more for inputs in the production process. This raises their costs and thus reduces their margins. The lower margins puts pressure on their profits.

The prospects of lower profits, results in the stock price taking a hit. This happens to many listed companies. And results is wealth destruction for investors.

#5 Rising Interest Rates

This is not a direct fallout of the falling rupee.

However, if the rupee is falling due to the dollar's strength and the dollar itself is rising in part due to interest rate hikes by the US Fed, then the RBI cannot sit back and do nothing. It will have to raise rates too.

And this is exactly what it has been doing. It has been raising interest rates.

In fact, the expectations are the RBI will raise rates again on Friday, 30 September. This will make EMIs on loans more expensive. It will have a result of reducing consumption.

Also, stocks of high debt companies will come under pressure in the market.

So these were the ways, a falling rupee hurts you. But can you benefit from it?

The answer is yes, you can.

As investors, we can take advantage of a falling rupee by picking out companies that will profit from the decline.

Here are 5 sectors to consider...

#1 IT

This is the automatic choice for most investors.

As most of the revenue of IT firms are from abroad and priced in dollars, investors flock to these stocks whenever the rupee falls.

But you must be careful. Don't just buy any IT stock Study the fundamentals and growth prospects as well as the valuations of the stock.

Not all IT stocks will be big winners.

Check out Equitymaster's stock screener for India's top IT stocks.

#2 Pharma

Pharma is also a sector where a significant percentage of revenue is from exports.

It also has the benefit of being a defensive sector. Investor demand for pharma stocks increases when there is some kind of crisis in the market.

However, you will need to be very selective in this space as an investor. All pharma stocks are not equal.

They vary in terms of strength of business fundamentals, growth prospects, percentage of revenue from exports, margins, and quality of management.

Thus pay close attention to all these aspects when picking pharma stocks.

Check out Equitymaster's stock screener for India's top pharma stocks.

#3 Chemicals

This is a tricky sector because of its diversity. They are a huge number of companies in this space catering to various segments. There are many small firms and some big ones.

India's chemical sector has been a big beneficiary of the China+1 strategy being adopted by many large companies around the world which are looking for suppliers from outside China.

But this doesn't mean you can ride this tailwind blindly.

Be sure to check the fundamentals of the chemical company you are studying along with its growth prospects.

#4 Engineering Goods

Machinery is a big export industry in India. And there is no shortage of engineering firms listed on the stock market.

But this is a vast sector. As an investor it would be best to take a bottom up approach to these stocks.

First look at the fundamentals of the stock and only if it checks out, then move on to its growth prospects, its industry, etc.

And make sure that exports comprise a significant part of the revenue and is also growing.

#5 Textile

This is another big beneficiary of the China+1 strategy.

After a decade of stagnation, India's textile sector is finally asserting itself on the global stage. The recent crash in yarn prices has been an additional tailwind.

Companies with an established international clientele, low cost operations, decent margins, strong cash flows, and low debt, will be the winners of India's textile export boom.

Be sure to buy only those stocks trading at reasonable valuations.

So these are the 5 ways to play the fall in the rupee as an investor. If you put in some effort, the falling rupee might benefit you instead of hurting you.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...