5 Ways A Weak Indian Rupee Gains You…and Hurts You

The rupee is now within striking distance of the 85 mark to a dollar.

This target of 85 has been predicted by many market gurus for a long time and now looks like it will be hit soon.

Should you be worried? What is the impact of rupee depreciation on you? And most importantly, is there any way you can benefit from it?

First let’s see how falling rupee hurts you…

imported inflation

India is a net importing country. This means importing more than we export. According to government data, in the financial year 2021-22, India’s imports stood at US$610.22 billion and exports were US$417.81 billion.

Since the US dollar is the world’s reserve currency, it is also the world’s main invoicing currency for goods and services. If the US dollar strengthens, that is, the rupee weakens, the cost of imports increases.

The same will happen even if the import volume remains the same. This means, all imported goods become more expensive. This is called imported inflation.

The cost of India’s large imports – crude oil, natural gas, all kinds of minerals, machinery, electrical equipment, equipment, chemicals – have all increased significantly. It controls inflation in India, which is already high, it is hard to control.

foreign debt

It may not affect you directly but it affects companies which have debt denominated in foreign currency.

Thus, if you are an employee, shareholder, supplier or customer of these companies, you will feel an indirect impact.

When the loan is denominated in dollars, the principal and interest payments have to be made in dollars. If the rupee depreciates against the dollar, as it is happening now, more rupees will be needed to pay off the dollar’s debt.

According to RBI, India’s external debt stood at US$620.7 bn at the end of FY22. This is a huge number and has increased to US$42.1 billion in one year. And with the dollar rising, corporates with external debt will find it difficult to repay.

high fuel prices

This is largely a part of the imported inflation covered above, but should be indicated separately because of its importance.

India imports more than 80% of its fossil fuel needs. India’s biggest import is crude oil. Thus rising fuel prices affect all of us.

In fact, whenever the price of crude oil rises even if the dollar does not rise, the rupee starts coming under pressure.

Crude oil prices have been falling recently and that is good news but the sharp rise to US$130 a barrel has done significant damage to the economy by slowing growth and contributing to high inflation.

falling stock prices

As a net importing nation, it logically follows that most of the companies listed on the stock exchange are dependent on imports in some way or the other. It takes the form of crude oil and input commodities.

As the rupee depreciates, corporate India pays more for inputs into the production process. This increases their cost and thus reduces their margin. Low margin puts pressure on their profits.

Low profit potential is the result of a fall in the share price. This happens with many listed companies. And the result is wealth destruction for investors.

rising interest rates

This is not a direct effect of the falling rupee.

However, if the rupee is depreciating due to the strengthening of the dollar and the dollar itself rising due to the hike in interest rates by the US Fed, the RBI cannot sit back and do nothing. He also has to increase the rate.

And that’s exactly what it has been doing. It has been raising interest rates.

really, RBI hikes rates Again on Friday, 30 September. This made the EMI on the loan more expensive. This will have the effect of reducing consumption.

Also, there will be pressure on the shares of companies with high debt in the market.

So these were the ways, the pain of falling money gives you. But can you take advantage of it?

The answer is yes, you can.

As investors, we can take advantage of the falling rupee by choosing companies that will benefit from the fall.

Here are 5 areas to consider…

This

This is the automatic option for most investors.

Since most of the revenue of IT firms comes from overseas and is priced in dollars, investors flock to these stocks whenever the rupee depreciates.

But you have to be careful. Don’t buy any IT stock, study the fundamentals and growth prospects as well as the valuation of the stock.

Not all IT stocks will be big winners.

pharma

Pharma is also a sector where a significant percentage of revenue comes from exports.

It also has the advantage of being a defensive zone. When there is any kind of crisis in the market, the demand of investors for pharma stocks increases.

However, you as an investor will need to be very selective in this area. Not all pharma stocks are the same.

They differ in terms of strength of business fundamentals, growth prospects, percentage of revenue from exports, margins and quality of management.

Therefore, while choosing pharma stocks, pay close attention to all these aspects.

chemicals

It is a difficult area because of its diversity. They are a plethora of companies in this sector catering to different sectors. There are many small firms and some big ones.

India’s chemical sector has been a major beneficiary of the China+1 strategy being adopted by many large companies across the world that are looking for suppliers from outside China.

But that doesn’t mean you can blindly drive this tailwind.

Be sure to check out the fundamentals of the chemical company you are studying along with its growth prospects.

engineering goods

Machinery is a major export industry in India. And there is no dearth of engineering firms listed on the stock market.

But it is a huge sector. As an investor it would be best to take a bottom up approach for these stocks.

First look at the fundamentals of the stock and only then examine it, then move on to its growth prospects, its industry etc.

And ensure that exports form a significant part of the revenue and continue to grow.

Cloth

This is another big beneficiary of China+1 Strategy,

After a decade of stagnation, India’s textile sector is finally establishing itself on the global stage. The recent drop in yarn prices has been an additional tailwind.

Companies with an established international clientele, low cost of operations, good margins, strong cash flow and low debt will be the winners of India’s textile export boom.

Be sure to buy only those stocks that are trading at a fair valuation.

So here are 5 ways to play the rupee depreciation as an investor. If you put in some effort, a falling rupee can benefit you rather than hurt you.

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from equitymaster.com