The US dollar has been strengthening over the last few months. The dollar index, which pegs the relative rise or decline in the US dollar versus various other countries that the US conducts trade with, was at 80 or so at the start of July this year. It now stands a tad below 90. While this has been a significant rise, expectations are that this will continue.
For one, a rise in rates by the US Federal Reserve might lead to a flight of capital back to the US. Secondly, other developed economies such as Europe and Japan have been relatively weaker compared to the US' economy, giving a further fillip to the dollar. So the expectations that the dollar may gain further ground are not completely unfounded.
So if this eventuality takes place, should investors in India be worried?
Not completely. For though the dollar has strengthened of late vis-a-vis other currencies, the rupee itself has been quite stable and has hardly weakened as a response.
One big reason for this is the perception of much improved fundamentals of the economy during this time. The current account deficit has narrowed, and the outlook on both the growth of the economy going forward and the government's ability to manage the fiscal deficit has improved.
However, make no mistake. There could be short term jitters in the markets if the dollar sees a sharp rise due to an event like interest rates being increased in the US. But over a longer period of time, such events will hardly make a difference to equity markets here in India.
Investors will do well to remember that though stock prices are at the mercy of such events in the short term, over the longer term, stock prices will track the growth in the value of Indian companies. And nothing else.
It would be wise indeed to remember this while making your important investing decisions.