D K Aggarwal
The slide in the rupee, in line with emerging market currencies, is increasingly being recognised as a concern for the Indian economy. This follows Feds signal that it would hike interest rates thrice in 2018 as the US economy is growing amid modest inflation.
Also, emerging market companies and governments combating rising cost of borrowing in dollars face increasing pressure as $249 billion needs to be repaid or refinanced through next year. There is a sense of cautiousness among investors because rising rates mean they need to pay more for unprecedented amount of borrowing, which could push balancesheets of emerging companies towards a tipping point.
If data are to be believed, the rupee has depreciated between March-end and mid-May on the back of rise in US treasury yields. Besides, the surge in prices of industrial metals and oil, sanctions against Russian companies contributing to the former, hardening demand and falling inventories dragged the rupee much lower.
Apart from above factors, persistent outflow of foreign funds from the Indian stock as well as bond markets has also impacted rupee performance. The rupee has weakened by 6.44 percent so far in 2018. In August 2013, the local currency had touched its all-time low of 68.8 against the dollar on Feds “taper tantrum”. There is cautiousness among investors that rupee depreciation, if the trend continues, could compel the RBI to increase policy rates higher.
The sharp slide in the rupee may not only impact fiscal mathematics, but severely affect the cost of borrowings for the corporate sector. Undoubtedly, the drop has been discomforting investors as a weaker rupee could spell trouble for a number of sectors that have a higher amount of dollar-denominated debt on their books. To name a few are oil marketing companies, power and telecom players, automobile firms and capital goods companies.
On the flip side, with a depreciating rupee, the value of exports would naturally increase. Hence, it would be a boon for the export-oriented sectors such as IT and pharma with a large exposure to the US. IT firms such as Infosys, TCS, HCL Technologies and pharma players Sun Pharma, Lupin, Cadila , Ajanta Pharma and Aurobindo Pharma are a case in point.
Investors may invest in these stocks and can take benefit of the rupee depreciating scenario, but they need to check if the company they intend to invest in have healthy business prospects and margins.