Weakening Rupee & Its Impact on Financial Market

Topics: Currency, Light crude oil, United States dollar Pages: 8 (2520 words) Published: January 3, 2013
Weakening Rupee and its impact on Financial Market

A depreciating rupee is usually a reference to its falling value against the dollar. Last year this time with $1 you could get around Rs44-45; now you can get as much as Rs55-55.50 with $1. If you earn in dollars and spend in rupees or have a stack of dollars, its good news for you. Stock market impact

The value of the rupee will also have an indirect impact on your investments. Indian capital markets rely heavily on foreign flows through foreign institutional investors (FIIs). In 2011, FIIs invested Rs6.11 trillion in equity compared with Rs2.85 trillion from domestic institutional investors (DIIs). So far in 2012, FIIs have invested Rs3.48 trillion in equity versus DII investment of Rs1.39 trillion. Now, if the rupee is depreciating, an FII with say $100 invested in Indian equities stands to lose even if the actual price of equity remains the same. This happens because as the rupee depreciates, the amount of dollars that can be bought per rupee is lower. So if $100 at an exchange rate of Rs45 per dollar could buy 450 units of a stock priced at Rs10, at Rs55 per dollar (assuming the price of the stock remains at Rs10) the foreign investor will get back only $81. This means in a depreciating rupee scenario, FIIs would be wary of investing in India. Since they hold a majority of investments as of now, this can keep stock prices subdued. Financial Services Sector

With the rupee weakening and policy paralysis, foreign institutional investors (FIIs) are reducing their exposure to the Indian equity markets. With FIIs pulling out of India, broking firms are seeing a significant decline in volumes. This would have a negative impact on the company’s profitability. Those broking firms which have more number of foreign institutional clients are likely to be hit more Investments

For stock market investors, the weakening rupee hurts on several fronts. The companies with significant foreign currency borrowings, or those which import raw material from abroad, have already taken a hit. These firms are now shelling out more rupees to repay every dollar borrowed and spending more rupees on imported raw material. This is eroding their profitability. The impact has been clear in the company's financials right from the September 2011 quarter earnings, through the December 2011 and March 2012 quarter results, and will continue to reflect in the June earnings as well. India Inc's profitability has been significantly affected due to the mark-to-market hit taken on foreign currency exposure. The weakness in the rupee may further dampen the FII sentiment, which has already been impacted due to policy inaction and macro troubles. This is because the value of their investments (in dollar terms) is eroding, which may prompt them to pull out more money from the markets. Dollar Demand-Supply

Rising oil prices mean more dollars are required by Indian oil companies to import crude oil since oil price is quoted in the US dollar in the international market. Apart from the usual high requirements of oil companies, dollar demand was seen coming from companies redeeming their external commercial borrowings. All these events lead to high dollar demand whereas bad equity market and policy paralysis are attracting little foreign investment, whether in financial or real asset. And there is no sign of any change in this equation in the near future. Hence, this imbalance of higher dollar demand would continue for some more time. Global Factors

The current crisis in the Euro zone may make investors more risk-averse. As a result, they may reduce their asset exposure from emerging economies like India, thereby selling more rupees. The present environment is dominated by euro zone concerns, triggered by political uncertainty in Greece. All major global currencies have weakened against the US dollar. The recent election results in France and Germany are pointing towards negative sentiments for austerity measures...
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