InvestorQ : I have seen see the stock markets getting weak with the weakening of the rupee versus the dollar. What is the connection and why does this happen?
Aashna Tripathi made post

I have seen see the stock markets getting weak with the weakening of the rupee versus the dollar. What is the connection and why does this happen?

Answer
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Dinesh C Nagpal answered.
3 weeks ago


Only in the short term does this scenario occur of Nifty and stocks performing inverse to USDINR trend. Over medium to long term it completely discounted. FPI & FDI inflows and outflows impact USDINR movement and also indicate mood of foreign investors towards India.


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Tisha Malhotra answered.
1 year ago


When the Indian Rupee weakens there are some concerns for Indian corporates but there are also some positive takeaways for the exporters. Here are some important implications which explain why the rupee has an impact on the equity markets:

Oil imports become more expensive: This is a genuine worry as India relies on imports to meet over 75% of its oil requirements. Oil has already crossed $75/bbl in the Brent Crude market and global investment banks like Bank of America are already talking about $100/bbl. Even the world’s largest exporter of oil, Saudi Arabia, has been hinting at a level of $100/bbl for Brent crude. As oil becomes more expensive, it fuels inflation locally and makes a case for higher interest rates. But the RBI may not be able to hike rates proportionately and the only way out could be to let the INR weaken.

Foreign flows could be headed out: Foreign portfolio flows into Indian debt are most vulnerable to weakness in the rupee. In India foreign flows into debt are driven by the yield spread (between the US and India) and the strength of the INR. If the rupee is weakening then global investors will look to pull money out of India and park it in safe havens. This could be a catch-22 situation with weak rupee leading to capital outflows and these outflows in turn leading to further weakening of the rupee. For India, this is important due to its reliance on portfolio flows to bridge the fiscal deficit.

Indian companies could see a rise in costs: This is partly the oil story because higher oil prices leading to an across-the-board rise in costs for Indian companies. But there are other industries like capital goods, telecom, power and chemicals which depend on import of key inputs from abroad. Since most of these imports are denominated in US dollars, a weak rupee could put pressure on the cost structure of Indian companies. A pressure on costs will mean pressure on OPMs and NPMs.

Additional risk for foreign currency borrowers: We all know that if you borrow in dollars and do not hedge your currency risk, then you run a huge risk. Let us understand this currency risk with a real example. Assume that Alpha Ltd. had borrowed a 1 year loan of $5 million through Foreign Currency Bonds at 5% interest. Let us also assume that when this loan was taken on Jan 01st the INR was at 63.30/$ and when the loan is repaid after 1 year, the INR is at 69.20/$. Check out the table below:

Particulars (Borrow)

Amount

Particulars (Repay)

Amount

Amount Borrowed

$5 million

Amount Repaid

$5 million

Exchange Rate

63.30/$

Exchange Rate

69.20/$

Rupee amount Raised

Rs.31.65 crore

Rupee Amount Repaid

Rs.34.60 crore

Interest cost

5%

Interest paid

Rs.1.583 crore

Original Interest Cost

Rs.1.583 crore

Currency Costs

Rs.2.950 crore

Actual Cost of Loan

Rs.4.533 crore

Actual Rupee Interest

14.32%

Normally, when companies borrow in dollars, they hedge with a forward cover. Had the company not taken the forex cover, then the actual rupee interest cost would have been 14.32% instead of 5% after considering the currency effect.

But, a weak rupee will be a big boost for exports: The good news is that a weak rupee will give a boost for exports of goods and services as it makes exports cheaper and more competitive. Even at the current level of 67.33/$, the rupee is overvalued in REER (Real Effective Exchange Rate) terms. That could automatically rectify the rising trade deficit and put the entire financial system back in order. If that happens, then a weak rupee could actually be a boon for India Inc.