Reading the rupee

Reading the rupee

What is the implication of a weakening rupee for the investment market?

For those of us using motor vehicles, the last few weeks have been painful. Petrol and diesel prices are inching higher and higher, and these days it costs a lot more to fill our fuel tanks. In this column, let us examine why this is happening. Along the way, we will also see how we can relate the concepts that we learnt in previous columns of this series to what is happening now. You see, even as we were going about our daily life, interesting things were happening politically and financially across the globe.

Fuel prices are higher because crude oil (the raw material for petrol and diesel) prices have been going up internationally. But this is not the whole story. The price we pay for petrol and diesel is way more than what we paid for them when crude oil was at double the current price. So what is going on? This is because there is another factor at play — the dollar-rupee exchange rate. If you have been following the news, you would be aware that the Indian rupee (INR) has weakened by around 10% against the U.S. dollar over the last few months. For a relatively stable currency like the rupee, this is a big move. Since we import a lot of crude oil, a weak INR makes imports costlier.

Dynamics

But why is the INR weakening? With the benefit of hindsight, we can always attribute this to all kinds of reasons. However, let us look at things in context. U.S. President Donald Trump’s confrontational political stance against Turkey and China resulted in the wobbling of the Turkish lira and to a lesser extent the Chinese yuan. The emerging markets as a group (including India, Brazil, South Africa and Indonesia) started bearing the brunt, leading to weaker currencies and weaker stock markets. Along with that, interest rate hikes by the Federal Reserve of the U.S. exacerbated the moves. To cut a long story short, our markets are vulnerable to political and financial troubles brewing elsewhere in the world. However, our stock markets have weathered the storm rather well.

Implications

As regular readers of this column, you know what question is coming next. How can we capture market trends via investments based on the current investment climate? We know the INR is weakening. This is, however, good for companies that export or have global revenue. Why so? Because their costs are in INR and their revenues are in currencies like the U.S dollar and euro, whose value is increasing against the INR. Check out the stock prices of top companies like Infosys, TCS, Sun Pharma, and Aurobindo Pharma in export-oriented sectors like IT services and pharmaceuticals. They are all making a lot of money for their investors.

By paying attention to what is going on around us, we become better investors. Can you identify some import-heavy industries? What are the leading companies in these sectors? What is happening to their stock price?

The writer is an alumnus of IIM Bangalore and co-founder, Money Wizards. chari.venkatesh@gmail.com

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