Benefits of weak rupee on stock market

Have you seen headlines about how the rupee's value is decreasing versus the dollar? Did you assume this spelled doom for the Indian stock market just because the word 'depreciation' has a negative connotation? You might want to reconsider.

Yes, any currency depreciation reduces the currency's worth, but that is what large IT businesses rely on to increase earnings, resulting in a positive market.

Decoding rupee depreciation

In a floating exchange rate system, where demand and supply determine the value of a currency, depreciation refers to a decrease in the currency's value.

As a result, rupee depreciation is defined as a decrease in the value of the rupee in relation to the dollar, suggesting that the rupee has become less valuable and weaker in comparison to the dollar.

For example, if the value of one US dollar rises from Rs 70 to Rs 75, the move is referred to be rupee depreciation.

Currency appreciation, on the other hand, refers to a rise in the value of a currency. As a result, rupee appreciation will result in the rupee gaining versus the dollar.

The rupee fell 36 paise to a new lifetime low of 78.29 against the US dollar on June 13. Following that, the rupee rose somewhat when the central bank intervened with several measures. Stocks have also dropped, with the nifty Index down more than 15% from the last two months.

Most people equate rupee devaluation with economic hardship. While this may be somewhat true, rumours of the Rupee falling may cause the stock market to rise.

Baffled? Let's have a glance at how this occurs.

Companies who import goods like as oil and gas, food and drinks are the ones that suffer the most from the rupee's depreciation. This occurs as the Rupee's value falls against the US Dollar, making imports costlier. Importers of raw commodities, capital-intensive industries, and foreign borrowings will be the worst hit. This will result in the stock values of these firms falling on the market.

Companies who rely on exports, on the other hand, will benefit the most from the rupee devaluation, since exporting products becomes more profitable. A huge value of Export business of Pharma sector is likely to grow due to plunging value of rupee against dollar.

Sector to watch

While a falling rupee has a negative overall impact on the stock market, there are some industries that will profit.

A falling rupee will benefit export-oriented companies such as IT, textiles, pharmaceuticals, and metals, which generate most of their income in US dollars.

According to IT research firm Forrester, India's top three IT services firms increased their share of the country's export revenues to 41% this year, up from 26% three years earlier. As it can be clearly seen in the graph,

Companies that import commodities such as oil, gas, and FMCG are affected by the rupee's depreciation. This will be reflected in the stock price of respective company. Automobiles, real estate, and infrastructure would all suffer because of the rupee's depreciation.

Stocks to watch

All the major IT services stocks, particularly the top IT services companies like TCS, Infosys and Wipro. Pharmaceutical sector with highly export oriented stocks like Dr Reddys, Cipla, Sun Pharma. The chemical sectors with companies like Vinati Organics, PI Industries and Fine Organics.

A weak rupee will have a detrimental impact on edible oils and petroleum products, which may not be favorable for Adani Wilmar and Reliance. Page Industries and Jubilant Foods might be hit since they pay international corporations’ royalties for franchises in India.

However, it is important to remember that devaluation can alter market sentiment since it reduces foreign investment. Foreign investors tend to withdraw out of assets when the rupee weakens, which can have a negative impact on the stock market.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

Research done by: Ketan Sonalkar, SEBI Rgn No INA000011255

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