Rupee’s Devaluation Against the US Dollar
Source and citation: Information adapted from a PTI article published on January 24, 2024.
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Analysis for Layman
The Indian rupee saw a slight devaluation of 9 paise, closing at 83.16 against the US dollar. This depreciation was influenced by concerns about rising crude oil prices and foreign investors pulling money out of Indian markets.
However, the impact of this depreciation was partially offset by the weakening of the dollar index globally and the increase in India’s foreign exchange reserves in the past week.
While the higher trade deficit resulting from expensive oil imports puts downward pressure on the rupee, the reported increase in forex reserves to $618.9 billion suggests that the risks related to import cover may be decreasing.
The rupee’s movement was also influenced by a decline in domestic stocks as foreign investors sold Indian stocks worth ₹545 crore on that day. These mixed factors led to a marginal depreciation of the rupee.
Impact on Retail Investors
For retail investors, the slight depreciation of the rupee against the dollar, driven by the costs of oil imports, highlights the challenge faced by the Reserve Bank of India (RBI) in balancing inflation management and economic growth.
While a weaker rupee makes essential energy imports more expensive, potentially raising the risk of a trade deficit, excessive intervention to strengthen the currency can attract more short-term foreign capital, straining the current account balance over the long run.
However, the reported increase in forex reserves provides the RBI with an adequate buffer to prevent sharp currency fluctuations or liquidity squeezes for the time being. As a result, investors can expect the RBI to manage the exchange rate in a measured manner, aligned with prudent economic objectives.
Overall, marginal currency movements are unlikely to significantly alter the investment environment for retail investors in the near to medium term. A competitive currency, achieved through restrained intervention, also enhances export competitiveness, supporting market growth.
Impact on Industries
The marginal depreciation of the rupee due to higher oil import costs poses minor risks for industries that are dependent on the crude oil value chain, as their input prices may remain susceptible to forex fluctuations.
Sectors such as paints, adhesives, tires, and plastic products may experience some margin pressures if they cannot fully pass on the increased input costs, particularly for discretionary applications. However, airlines with a significant portion of their costs in dollars may benefit from the dip in the rupee.
For exporters in sectors such as agriculture, leather, textiles, and engineering goods, a competitively priced currency provides incentives for demand internationally, in both emerging and developed markets.
Therefore, export-oriented sectors and strategists substituting certain crude-based inputs with alternatives may benefit from optimally competitive exchange rates that facilitate trade positioning.
Long Term Benefits & Negatives
In the long run, allowing for some gradual and orderly depreciation of the rupee, aligned with macroeconomic realities, can help sustain export momentum, benefiting the current account balance and economic growth. A relatively competitive currency also aligns with India’s positioning as an attractive investment destination.
However, risks of excessive currency volatility remain, which can undermine investor sentiment if business visibility is clouded by forex uncertainties related to import contracts, overseas borrowings, and more.
Hence, the RBI needs to maintain its credibility by demonstrating an adequate buffer of forex reserves to prevent sharp and sudden currency movements.
Overall, retail investors should not be overly concerned about modest currency fluctuations over the long term, as RBI policies balance growth priorities. A competitive currency also supports import substitution, contributing to self-reliance.
Short Term Benefits & Negatives
In the short term, the marginal depreciation of the rupee may continue for the next few weeks if global crude oil prices rise further from the current $80 per barrel due to seasonal demand. However, the reported growth in forex reserves equips the RBI to prevent any excessive depreciation.
For stock investors, a slightly weaker rupee aligns with expectations of a peak in domestic inflation, which could pave the way for interest rate cuts, ultimately supporting economic recovery. This positive trade-off helps buffer the markets from concerns about the currency.
However, the risk of a higher trade deficit due to elevated crude oil import bills needs to be monitored to avoid a sharp depletion of the current account surplus, which has been rebuilt over the last two years. Investments in renewable energy can also contribute to long-term import substitution.
Overall, the movement of the rupee appears to be in line with macroeconomic stability objectives for now, without significantly undermining growth or inflation. A competitive currency also supports export ambitions.
Impact of Rupee Depreciation on Indian Companies:
- ONGC Videsh Ltd.: As a major exporter of crude oil, ONGC Videsh benefits from a weaker rupee, as their foreign earnings translate to more rupees upon repatriation.
- Reliance Industries Ltd.: With significant oil and gas exports, Reliance could see increased rupee earnings from these activities.
IT & Pharmaceuticals:
- Infosys Ltd.: A weaker rupee makes Indian IT services more competitive in the global market, potentially leading to increased orders and revenue for Infosys.
- Cipla Ltd.: Pharma companies with significant exports gain from a weaker rupee, as their dollar-denominated revenues translate to higher rupee profits.
Travel & Tourism:
- Indian Railway Catering and Tourism Corporation Ltd. (IRCTC): A weaker rupee could make India a more affordable destination for international tourists, potentially boosting IRCTC’s travel and tourism business.
- Indian Oil Corporation Ltd. (IOC): As a major importer of crude oil, IOC’s import costs increase with a weaker rupee, impacting their margins and profitability.
- Bharat Petroleum Corporation Ltd. (BPCL): Similar cost pressures from higher import costs could weigh on BPCL’s financial performance.
- Tata Motors Ltd.: With dependence on imported components for some car models, Tata Motors could face higher manufacturing costs due to the rupee depreciation.
- Maruti Suzuki India Ltd.: Similar cost pressures due to imported components could impact Maruti Suzuki’s margins and profitability.
Companies with Foreign Debt:
- Adani Ports and Special Economic Zone Ltd.: Companies with significant foreign currency debt face higher rupee liabilities with a weaker rupee, potentially impacting their financial position.
- Oil exporters, IT & pharma companies, and travel & tourism businesses could see positive sentiment due to potential for increased earnings and business opportunities.
- Oil importers, import-reliant companies, and those with foreign debt may face negative sentiment due to concerns about rising costs and financial pressures.
Note: This analysis is based on the available information and is subject to change based on future developments. It is not intended as financial advice, and investors should conduct their own research before making any investment decisions.
- Foreign Investors: With a weaker rupee, foreign investments in India become less attractive as their rupee returns diminish. This could lead to reduced foreign investment inflows, impacting Indian capital markets.
- Global Oil Producers: A weaker rupee can make Indian crude oil imports cheaper, potentially benefiting global oil producers like Saudi Aramco and ExxonMobil.
- Global investors may have negative sentiment towards Indian markets due to reduced investment attractiveness.
- Global oil producers could see positive sentiment due to potentially increased demand for their product in India.
Disclaimer: This information is intended for educational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any investment decisions.