Effect of Rupee Movement On Stock Prices

Effect of Rupee Movement On Stock Prices

 

Rupee is again near its lows against dollar. In recent past rupee movement has been quite volatile and this volatility can be attributed to factors like Government Policies, Interest Rate Scenario and demand and supply imbalance. Although as an individual stock market investor we cannot control volatility but we can definitely device some strategies which will enhance our returns. If you can proactively sense the direction of rupee movement (either up or down) you can use it to your advantage by capitalizing on price fluctuation of exchange rate sensitive stocks.

In this article we will identify exchange rate sensitive sectors and stocks in Indian stock market and try to understand the correlation between stock price and exchange rate. Individual investors can exploit this knowledge to earn appreciable returns in short term.

Impact of Exchange Rate Fluctuation

Indian companies can be divided into two groups based on the impact of currency fluctuation on their stock price and profitability:

1. Net Exporters – These companies sell product to outside world and receive payment in foreign currency (be it dollar, pound, euro etc). Whenever rupee appreciates as compared to these currencies, companies are exposed to translation loss as they can buy fewer rupees with same amount of foreign currency. This translation loss hurts their profitability since the raw material cost is in terms of rupees. Similarly, company’s profitability increases in case of rupee depreciation.
2. Net Importers – These companies buy product from outside world and make payment in foreign currency. Whenever rupee appreciates they are able to buy more foreign currency for payment resulting in overall translation gain. Profitability of companies increases in this case and similarly, profitability decreases when rupee depreciates.

Choosing the sectors to invest

Now we know the broad impact of currency movement so let’s focus on the sectors where one should bet (long or short) in case of anticipated currency movement (up or down)

Information technology 

This is one of the sectors which are most sensitive to exchange rates. It falls into category of net exporter hence benefits from rupee weakness as compared to foreign currency. This is one of the recommended sectors to take exposure for short term as the stock price movements are in the tune of 4 to 5% in very short span of time.

Textiles 

This sector is a net exporter and receives most of the payment in dollar terms. It benefits once the rupee gets week.

Petrochemical 

Earnings in most businesses of this sector are linked to dollar as the key raw material i.e. crude oil is purchased in USD. Rupee appreciation benefits this sector in short and long term.

Pharmaceuticals 

This sector has exposure both in terms of export and import. They earn foreign currency through exports but they need it for importing various chemicals too. This sector is a tricky one with respect to exchange rates.

Auto 

This sector has considerable amount of income from export of vehicles. It benefits from rupee weakening but there is one more angle to it. Sometimes the parts they use for assembly are imported. The one who uses more indigenous parts benefits the most in case of rupee depreciation.

Summary of Buy/Sell decisions in Stock Market

Sector	Category	Rupee	Exposure
Information Technology	Exporter	Strong	Sell
		Weak	Buy
Textile	Exporter	Strong	Sell
		Weak	Buy
Petrochemical	Importer	Strong	Buy
		Weak	Sell
Pharmaceuticals	Exporter/Importer	Strong	Tricky
		Weak	Tricky
Auto	Exporter	Strong	Sell
		Weak	Buy

Conclusion

This article covers important sectors and you can use it as reference to take informed decision. There are a lot of other sectors which might get affected based on their foreign currency exposure. If you want to analyze impact of currency movement on a sector of your choice you need to focus on basic pointers like company status (net exporter or net importer) and how much hedging company does so as to mitigate the effect of exchange rate fluctuation on its profitability.

RAJIV KAPOOR
FCS
Company Secretary in Practice
9839034761