How to Invest to Benefit from Rupee Fluctuations

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  • 09 May 2023

Somewhere between 25 paisa coin and 10 Rs coin we grew up!

When Rahul’s Dad visits New York, he mentally converts dollars into rupees. A coconut costs around 9$ in the US. “9$ in Rs is 650-700, Rahul! In Mumbai, it just costs Rs 50”, he cried. He wondered why everything is so expensive in the US. The reason is, rupee depreciation. There was a time when the US dollar was just Rs 5. Today, it’s hovering around Rs 79. What should you do in such times?

Now, rupee depreciation does not just affect your foreign travel. It can also pinch the pocket if you are into stock market. Many investors and traders are only focused on stocks. That’s a huge mistake. Remember, the stock market is an integral part of the economy and doesn’t function in isolation. Strengthening and weakening of the Indian rupee have a major influence in the economy. Data reveals that over the past decade, the Sensex-Nifty and the Rupee-Dollar exchange rate movement have shown a strong correlation. That too a positive one. But why peg rupee against the dollar?

India is a net importing country. And two-thirds of that is energy import. Therefore, the value of the rupee versus the dollar really makes a lot of difference. If the oil or gas prices go up, the prices of fruits, vegetables, transportation will go up. Your savings will get impacted and thus, the equity market. Even if the energy prices remain stable but the rupee weakens against the dollar – the landing price of the fuels will eventually get impacted. This is nothing but imported inflation.

You would say, demand and supply. Of course that. Apart from that, some factors that impact the Indian stock market are the same as those that impact the Indian currency. These are the overall global economy and geopolitical events. Besides, trade deficit, monetary policies, forex reserves, foreign institutional investments etc. also influence it.

Rupee-Dollar Impacts Investments Both Directly and Indirectly

Imagine you own a company and have a lot of foreign borrowings in dollar terms. Now, if the dollar rises 10%, you will have to repay this debt in dollars and also pay interest in dollars. Suddenly, without you borrowing even an extra dollar, your liability goes up by 10%! Similarly, if you're an importer of items like perfumes, TVs, mobile phones, computers, etc., they would become expensive. That’s how the oil import dependent companies like airlines, oil & gas marketing companies, paint companies stand to lose when dollar appreciates against rupee. On the other hand, what would happen if you're an exporter? IT companies like Infosys, TCS, Wipro etc., might earn bonanza profits! Similarly, pharma, automobile or healthcare sectors do well.

##Strategizing Investments So, irrespective of rupee depreciating or appreciating, you as an investor can plan your investments using this information. When the dollar goes up, note that stocks of import dependent companies or the ones with high foreign debt tend to fall that day. While, the shares of tech companies or net exporting companies (assuming other factors remaining constant) will do well. Thus, you will need to understand which sector to choose when the reference rate for the currency rises or falls. Each sector responds differently to USD-INR rates and if you know about the possible impacts of the changes then you can choose the sectors and stocks wisely.

References: Economic Times

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