Gaining From Weak INR

Investor sentiment showed a strong revival during 2014, and equity markets clocked fresh all-time highs. However, an aspect that just can’t be ignored by investors is the weakening rupee vis-à-vis the dollar – it currently trades at about Rs 62 levels (as we speak the Rupee is trading at Rs. 62.18 to the US Dollar). In August 2013, it had dropped to record lows of Rs 69 levels. This development is not just limited to the Indian rupee but is applicable across the globe including other emerging market currencies like the South African Rand as well as currencies of the developed world like the Euro and the Japanese Yen.

A weakening rupee affects not only India Inc’s performance in several ways, but has a broader impact on the entire economy including monetary policy, current account deficit, import and export growth, fluctuations in local prices of commodities like crude oil and coal.

In addition, the cost of studying overseas as well as holidays abroad rises. Similarly, the precious metal gold is dearer in local currency terms. Of course, export-centric companies like IT, BPO, pharma and shipping, amongst others, tend to gain from a weakening rupee.

But how do these things affect our investments? Rupee-dollar rates may not have major implications on your investment decisions as such yet the exchange rate scenario does affect your personal finances in ways detailed below:

RBI’s monetary policy / Impact on interest rates – A weakening local currency vis-à-vis the dollar could raise local product prices, and the central bank would have very little room to cut policy rates or it may even consider hiking rates. No cut in policy rate will add to borrower’s woes that are eagerly waiting for an end to the high loan rate regime.

This development, in turn, could adversely impact the returns offered by debt funds and equity funds over a period of 3-6 months. However, high local interest rates could result in attractive rates for fixed deposits offered by banks.

Importers and Exporters - Importers will strongly feel the pinch of falling rupee as they will be forced to pay more rupees on importing products. The country imports a range of products including crude oil, coal, palm oil and iron ore, amongst others.

No doubt the commodity cycle is weakening, but a weaker rupee often results in local companies / consumers not getting the full benefit in local currency terms. For instance – if you bought something worth $100 in let’s say May 2014, then you would have paid Rs. 58, but if you bought the same item for the same price in USD, you would now pay Rs. 62.

Conversely, a feeble rupee will bring delight to the exporters as goods exported abroad will fetch dollars, which in return will translate into more rupees. Also, a weak rupee will make Indian produce more competitive in global markets, which will help grow our exports.

The Indian IT /BPO and pharma industry has gained from a combination of specialized technical expertise and weakening exchange rate to establish a global presence for their product / services repertoire. This trend is expected to continue, going forward.

Country’s fiscal health – A weakening rupee can push up the cost of key products imported in the country like crude oil (international prices of which are in a downward spiral currently), coal and palm oil, and that’s despite a weakness in the global commodity cycle. This in turn would push up our current account deficit (CAD). A widening CAD is poses a threat to the growth of overall economy.

Fluctuation in precious metal prices – Precious metal (gold and silver) prices in dollars terms have been on a downtrend for nearly two years in global markets, but that has not been largely reflected in the local market. Local buyers would need to analyse the above trend and not rush into buying precious metal, as the exchange rate going forward is impossible to predict. Of course, need-based buying for marriages would continue, but a weakening rupee would push up the local price for buyers here.

Students studying abroad - Students who are already studying abroad will bear the maximum brunt of a depreciating rupee. Also, those planning to study abroad, will need to plan for a rising cost structure related to overseas college fees as well as living costs.

Parents of such students would need to ensure a sufficiently large savings pool that is easily accessible and that is possible via a long-term investment in equity and related investments.

Tourism - The depreciating rupee will surely be a dampener if you are planning your holiday abroad. Your travel as well as hotel charges will rise, let alone shopping and other miscellaneous spending activity.

Remittance from overseas / NRIs – Money saved is money earned. Depreciation of rupee is certainly good news for NRIs and they would get more in local terms when they repatriate their savings from overseas. NRIs could also consider investing in local equity-related funds with a long term view, in a bid to grow their savings pool in the local currency.

The weakening rupee creates winners and losers, but an investor needs to ensure that he is geared for the proverbial ‘win-win’ situation.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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