If you think that's something the foreign currency dealers may have to worry about and not you, think again.
Movements in the rupee do affect our lives and investments, specially in the stock market.
Let's talk about stocks
Upfront, let me explain appreciation and depreciation of the rupee.
Let's say $ 1 = Rs 50
If $ 1 = Rs 45
The rupee has appreciated but the dollar has depreciated. So you pay less rupees for every dollar.
If $ 1 = Rs 55
The dollar has appreciated but the rupee has depreciated. So you pay more rupees for very dollar.
Now, consider your investments in stocks.
When the rupee depreciates against the dollar, ie when every dollar fetches more rupees, companies that export earn more. For instance, you would have noticed that most of the IT services companies have shown very good second quarter results. That's because most of the business of these companies comes from selling their services to the US, and they get paid in
dollars. So when a dollar fetches more rupees, their earnings in rupees increase.
That's true for all exporters. So, other things remaining the same, you should invest in export-oriented companies when the rupee depreciates.
Of course, companies that export to Europe may not gain, because, while the rupee has depreciated against the dollar, it has actually appreciated (gone up in value) against the Euro.
That's because the dollar has been appreciating against all the major currencies, like the Euro, the pound and the yen, and the extent of appreciation is higher against the Euro than against the rupee.
So if an Indian exporter is being paid in Euros, he'll actually be getting fewer rupees than before. So it's important to check out the currency in which the exporter bills. According to Reserve Bank data, around 80% of India's exports are billed in US dollars.
On the other hand, many companies have in recent years borrowed abroad, usually in dollars. With the rupee depreciating against the dollar, they will now need more rupees to repay their dollar loans and to pay the
interest on their loans.
Companies that import a large part of their requirements will also lose, because they will now have to pay more in rupees for the same dollar value of imports. Companies that are setting up large projects, for example, that require a lot of imported machinery, will now see their project costs going up.
The FII factor
Yet another big impact of movements in the currency is in the flows of foreign money. During the last two years, the rupee had been appreciating against the dollar.
Suppose a Foreign Institutional Investor put in money into the Indian stock market. Now suppose the rupee appreciates by 5% in a year. That means, at the time of converting his rupees back into dollars, every rupee would earn more dollars.
If the stock the FII invested in provided him a return of 15%, his total return would be 20% (15% + 5%). No wonder foreigners were eager to put their funds into India.
Now, however, with a depreciating rupee, the time of converting his money back into dollars, he would have to pay more rupees to buy dollars. So if his stocks earn him a 15% return and the rupee depreciates by 5% per year, his return at the end of the year will be 10% (15% - 5%).
That's why analysts are worried whether FII flows will be sustained with a depreciating rupee. If FIIs no longer are pump in money in the Indian stock market, the bull run could slow down tremendously
What you need to know
Economists calculate whether the rupee has appreciated or depreciated against its major trade partners by using an index called the Real Effective Exchange Rate. According to this index, the rupee is still overvalued, which means that it could depreciate further.
When the rupee is depreciating against the dollar, you should invest in companies that export to the US and avoid those that are very dependent on imports.
Also, do remember that if you are making a trip abroad, you will have to pay more for the dollars.
Inflation will rise
However, a depreciating rupee will make oil imports costlier. That's because oil is priced in dollars.
Say the price of a barrel of oil is $50 a dollar. When the dollar was at Rs 44.5, we had to pay Rs 2,225 for a barrel of oil ($50 x Rs 44.5). Now, with the dollar at around Rs 45.7, we have to pay Rs 2,285 ($50 x Rs 45.7) per barrel. As you know, higher oil prices mean higher travel and freight costs and they add to inflation in the economy.
So if the government doesn't subsidise the rise in prices, inflation will rise. So a depreciating rupee could lead to higher inflation.
Gold
You must also have heard that the price of gold has shot up to more than Rs 7,000 per 10 gms recently. One reason is that the international price of gold has gone up. But the other is that gold is imported into India, and a depreciating rupee leads to a higher price for gold in the domestic market.
Why has the rupee started depreciating?
With the boom in the economy, imports have increased. The rise in the price of crude oil has also added to the import bill. The result is that our imports are higher than our exports. Even if we take exports from services into
account, that still doesn't cover our import bill.
That's what experts mean when they say that the current account deficit is rising. That's one reason why the rupee is depreciating.
So now you realise that currency movements affect all of us, in our daily lives as well as our investments.
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