Rupee Falls 5 Paise to Close at 83.21 Against Dollar

Source and Citation: Rupee Falls 5 Paise to Close at 83.21 Against Dollar, PTI, Jan 2, 2024

Table of Contents

Analysis for Layman

On the first trading day of 2024, the Indian rupee experienced a slight depreciation of 5 paise, closing at 83.21 against the US dollar. This signifies a minor weakening of the rupee compared to its value on December 30, 2022.

Experts attribute this early-year weakness to tepid trends in the domestic stock market, especially with the absence of global cues. Importers purchasing dollars for international trade transactions also contributed to the mild depreciation.

Despite the minor decline, the rupee remained stable, trading within the range of 83.15-83.45. This indicates reasonable resilience, supported by interventions from the Reserve Bank of India (RBI) through dollar sales. Additionally, the country’s forex reserves continued to rise, crossing $620 billion, bolstering external strength.

Impact on Retail Investors

For retail investors, the marginal rupee depreciation has limited direct implications on speculative trades or overseas investments in the currency market. However, indirectly, a weaker rupee can lead to higher costs for imported items such as electronics, edible oil, and automobiles, potentially impacting consumer sentiment if the decline is consistent. On the positive side, exporters and service providers earning global income, like IT firms, may benefit from a weaker rupee, boosting profitability and stock prices. Investors should differentiate between import-dependent and export-linked stocks, considering the impact on portfolios.

Impact on Industries

For corporates, the marginal 5 paise drop itself has negligible potential for a profit and loss (P&L) shift. However, if depreciation steepens beyond 3-4% yearly, it could contribute to broader imported input cost inflation, affecting industrial margins across the economy. Export-linked sectors, such as IT, textiles, and machinery, may experience higher profitability due to the conversion of foreign earnings. The RBI’s intervention aims to balance external competitiveness with imported price stability, preventing significant yearly weakness. Gradual depreciation is seen as allowing better adjustments.

Long Term Benefits & Negatives

Over the longer term, the value of the rupee will be determined by macro fundamentals, including growth differentials, inflation, and policy trajectories compared to global economies. Sustaining around 7% growth with a focus on productivity and policy reforms supports the rupee through structural demand tailwinds. However, global safe-haven demand shifts for the dollar or monetary policy divergences may introduce temporary volatility. The RBI’s approach involves smoothing large cyclical currency swings through reserves, permitting the currency to find its own equilibrium.

Short Term Benefits & Negatives

In the near term, the minor 5 paise drop has almost negligible practical impact on importers or exporters from a planning perspective. It indicates that the trading range is currently above 80 levels rather than appreciating significantly. With equity markets muted post the year-end holiday, importing entities appear to be using US dollar demand to hedge their payment requirements, explaining the mild weakness. However, sustained heavy dollar outflows by foreign investors from Indian stocks could exacerbate softness if global volatility rises. Currency stabilization around the 83-84 zone is expected over the short term based on real demand-supply dynamics unless sentiment deteriorates abruptly.

Potential Impacts of Rupee Depreciation on Indian Companies:

Indian Companies Gaining:

Exporters: A weaker rupee makes Indian exports more competitive in the global market, potentially benefiting companies like Reliance Industries (RIL), Tata Steel, Infosys, and Cipla. Increased export volume and improved margins could boost their stock prices.
IT Services Companies: Rupee depreciation improves their cost competitiveness and leads to higher dollar earnings, potentially favoring giants like TCS, Infosys, and Wipro. This could attract investor interest and drive share price appreciation.
Pharmaceutical Companies: Companies with significant export revenues like Cipla, Dr. Reddy’s Laboratories, and Sun Pharma could benefit from a weaker rupee boosting dollar earnings and improving profitability.

Indian Companies Potentially Losing:

Importers: Companies relying on imported raw materials or finished goods, like Automobile manufacturers, Oil Marketing Companies (OMCs) like Reliance Industries and Indian Oil, and Consumer Durables companies might face cost pressures due to higher import costs. This could lead to lower profit margins and potentially impact their stock prices.
Tourism Industry: A weaker rupee makes India a more expensive destination for foreign tourists, potentially impacting hotels, airlines, and travel agencies. This could lead to slower growth or even contraction in the tourism sector.
Companies with Foreign Currency Debt: Companies with significant foreign currency debt will face higher repayment costs due to the rupee’s depreciation, impacting their profitability and potentially harming investor sentiment.

Neutral:

Domestically Focused Companies: Companies primarily relying on the domestic market for sales and revenue, like FMCG and retail giants, might see limited impact from the rupee’s movement.

Global Companies:

Gaining:

Companies Benefitting from Weaker Rupee: Global companies with significant Indian operations who export from India could benefit from improved cost competitiveness and higher dollar earnings.
Investors in Indian Equities: If the rupee depreciation is accompanied by strong corporate earnings and positive economic outlook, it could attract foreign investors seeking higher returns in Indian equities.