Should You Change Your Investing Strategy after the Rupee's Fall?

The memes are flying thick and fast.

From the father of the nation peering out of a Rs 100 note and chanting 'Hey Ram' to the pivotal scene from the movie 'Hum Aapke Hain Kaun' where a main character comes tumbling down a flight of stairs and succumbs to her injuries.

Unless you are living under a rock, you wouldn't have missed the rupee's recent free fall against the US dollar.

King dollar is back and how. The value of the US dollar is the strongest it has been in ages, devaluing currencies around the world and casting a huge shadow over global economic growth.

The rupee hasn't been spared either. The 'safe haven' allure of the US dollar is impacting our national currency as well. So far this year, it's down more than 7% against the dollar, its biggest fall since 2018.

It won't surprise a lot of people if it breaks the 2013 record too, where it fell more than 11% against the greenback.

Now, as an investor, is the rupee's rapid fall against the dollar a worrying sign? Is this something that should keep you up at night? More importantly, is there a need to rejig your investment strategy in light of these developments?

Well, no better way to find this out than to go back in history and try and figure out how the markets have reacted to similar episodes over the medium to long term.

History may not repeat itself in the stock markets, but it does rhyme. Therefore, it always pays to look into the rear-view mirror to get a clearer view from the windshield.

So, here's a table that might help you.

Period	Rupee Depreciation /Appreciation CAGR	Sensex CAGR
Dec 00 - Dec 03	0.8%	13.7%
Dec 03 - Dec 06	-1.0%	33.2%
Dec 06 - Dec 09	-1.8%	8.2%
Dec 09 - Dec 12	-5.2%	3.6%
Dec 12 - Dec 15	-6.2%	10.4%
Dec 15 - Dec 18	-1.7%	11.4%
Dec 18 - Dec 21	-2.1%	17.3%

Source: RBI, ACE Equity, Equitymaster

I have divided the period between the year 2000 and 2021 into seven equal periods of 3 years each. I also have the rupee depreciation/appreciation and the Sensex growth, both in CAGR terms, for each of these 3-year periods.

For the period between December 2000 and December 2003, the rupee appreciated at a CAGR of 0.8% against the dollar while the Sensex went up at almost 14% CAGR.

This way, you can interpret the numbers for the rest of the periods also.

The takeaway from this table is simple. The depreciation or the appreciation of the rupee has no influence on the stock market returns over a 3-year period.

Let's, for argument sake, assume that rupee depreciation has a negative impact on the stock market.

By this logic, the period between December 2012 and December 2015 should have shown the worst returns for the Sensex as this is the period where the rupee fell the most. However, this is not the case. During this period, the Sensex grew at a respectable 10.4% CAGR.

Also, the period between December 2000 and December 2003 should have been the best one for the Sensex. That's the only 3-year period where the rupee appreciated against the dollar.

However, Sensex returns at almost 14% aren't the best of the lot. This honour is reserved for the December 2003 to December 2006 period which saw an impressive 33% CAGR for the Sensex.

The takeaway is clear. The rupee depreciation or its appreciation perhaps has an impact on the stock market over the near term.

However, over a longer-term period of 3 years, stock market returns are determined more by the underlying valuations and the earnings growth than the movement of the rupee.

Here's another interesting point...

I have added one more column to the table above.

Period	Rupee Depreciation /Appreciation CAGR	Sensex CAGR	% of stocks ending in +ve
Dec 00 - Dec 03	0.8%	13.7%	77.8%
Dec 03 - Dec 06	-1.0%	33.2%	85.8%
Dec 06 - Dec 09	-1.8%	8.2%	56.4%
Dec 09 - Dec 12	-5.2%	3.6%	48.6%
Dec 12 - Dec 15	-6.2%	10.4%	80.3%
Dec 15 - Dec 18	-1.7%	11.4%	63.1%
Dec 18 - Dec 21	-2.1%	17.3%	76.7%

Source: RBI, ACE Equity, Equitymaster

You see, I have data for only 720 stocks going all the way back to December 2000. I tried to find out what percentage of these 720 stocks gave positive returns in each of these three-year periods.

For example, 77.8% of the 720 stocks gave positive returns for the period between December 2000 and December 2003.

The next three year period was even better. Almost 86% of the same 720 stocks ended positive between December 2003 and December 2006. And so on.

Here again, there seems to be no co-relation between rupee depreciation and number of stocks giving positive returns over a 3-year period.

If rupee depreciation is good for stocks then the period between December 09 and December 12 should have seen a higher percentage of stocks go up. But only 49% of the stocks went up during this period.

Also, the first three-year period should have shown a lower strike rate because the rupee appreciated during this period. However, the strike rate at close to 80%. That is quite impressive.

In fact, there is a much stronger co-relation between the Sensex returns and the number of stocks that ended up in the positive.

So, a strong or a weak rupee depreciation has very little to do with the broader stock market returns over a 3-year period, it does not have any strong influence on the returns of individual stocks as well.

In my entire career also, I have never considered the exchange rate as an important input in my research process. It has always been about buying fundamentally strong companies at attractive valuations.

Yes, an adverse currency movement can have a near term impact on a company's profits. But fundamentally strong and undervalued stocks of the kind I like to recommend, recover from the blows sooner or later and get back on their long-term growth path.

In fact, you should never invest in a stock if your thesis is based predominantly on the currency movements. This amounts to speculation and not an investment in the strict sense of the term. And speculation is not good for the long-term health of your investments.

In conclusion, don't get into or out of stocks just because the rupee has fallen drastically against the US dollar.

Good quality stocks know their way around this kind of a situation. Most will come out on the other side with minimum damage.

So do what you do best i.e. focus on the underlying quality and ensure you are not overpaying.

Happy Investing!

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter

PS: While we are on the topic of good quality stocks, my latest video is all about one. It's a detailed analysis of one of India's largest AMCs, HDFC AMC and talks about its investment rationale and concerns and most importantly, its current valuations. Do take a look.