What are the causes and impacts of the rupee’s depreciation on the equity markets

Rupee Depreciation – What is the reason & impact on the Equity MarketsIn the year 2022, Global Financial markets have witnessed a roller coaster ride with major of the global markets now trading in with negative returns. The main reason for the downfall in the US equities is the rising inflation and the stagnant growth. India now being a part of the globalization, it have also taken heat of the global sell off and witnessed steep cuts in the equity as well as the currency markets. Indian rupee is also now trading near historical lows of around 80 levels due to strong dollar in international markets amid rising inflation in the United States. The domestic currency has now depreciated more than 7% since January 2022 along with the other international currencies.

Reasons for the depreciating Rupee:

1. Rising Global Inflation:
2. Surging Crude Oil prices
3. Dollar outflows from Equity & Bond Markets
4. Surging Global Interest Rates
5. Strong demand for Dollar
6. The rising dollar Index

Role of RBI in controlling Rupee Value:

Whenever there is a rise in the interest rates, the foreign Institutional Investors start pulling out their money from the emerging markets which is usually considered as risky investment whenever there is an uncertainty all over the globe. Even the higher yields in the foreign countries will exaggerate the FIIs selling in the countries like India where large amount of investment is already made by the foreign individuals from past many years.

A depreciating currency is always a night mare for any central bank all over the globe as they have crucial role to manage the global credits and movement of the foreign currency from import export activities among the corporate and internal business activities. Similarly, RBI has also taken many steps to contain the downfall in the rupee and managed it conveniently given the global concerns. In the current month, the fall in the rupee has exaggerated to the peak level and even RBI has not been able to keep the rupee value against the dollar below 78 levels as the central bank is also having some limitations and can only cap the prices to certain extent in the near term. RBI do continuously supply or sell dollars from the their end into the market whenever there is big fall in the rupee value but this will have only short term on the value.

Impact on the Corporate Earnings:

Weakening Rupee does have their impact on the earnings of many corporate entities that are directly or indirectly connected with the global markets. Stronger rupee always have a positive effect on the importing companies who imports their raw materials or finished good from any foreign country while vice versa, it will be negative for corporate companies who majorly exports their products outside India. Similarly, a depreciating rupee will have positive impact on exported oriented units which are engaged in product and service export businesses.

Which sectors are impacted positively by weak Rupee?

1. Information Technology
2. Pharmaceuticals
3. Export Oriented Companies

Which sectors are impacted negatively by weak Rupee?

1. Oil Marketing Companies
2. Import oriented companies which imports raw material for their finished goods
3. Gems & Jewelers
4. Electronics
5. Food & Beverages

In a nut shell, depreciating rupee will definitely have a negative impact on the Indian equities in the medium term period as we have already seen huge FIIs outflows from the equities in the last couple of quarters. Indian Equities will now have close watch on the RBI’s steps to curtail the Rupee depreciation in the near term followed by ongoing volatility in the Bonds and commodity markets. On the other hand, the global market movement followed by the yields in the money market will also be keenly watched by the market participants.

Stronger rupee always have a positive effect on the importing companies who imports their raw materials or finished good from any foreign country while vice versa, it will be negative for corporate companies who majorly exports their products outside India. Similarly, a depreciating rupee will have positive impact on exported oriented units which are engaged in product and service export businesses.

We recommend investors should start building their portfolios in these bad times where Rupee is at record lows, inflation is at record highs, RBI is in the mid of rising interest rate cycles, Russia & Ukraine war impact and huge FIIs outflows have already happened. As per our view, major of the negative news have already been factored by the markets and any positive news or development from the global front may trigger massive buying in the equities in the second half of the ongoing financial year.  For short tern investors, it is the time to stay calm and observe the price movements and for long term investors, this is the correct time to start investing in quality blue-chip stocks.