Depreciating Rupee – Still A Worrisome Factor For Equities

The past few weeks have been quite volatile, not only for the equity investors, but also for those who trade in currencies. The INR has remained volatile on consistently and has resulted in jittery trading in the Indian equity markets. Even today’s fall of more than 650 points is more or less related to the depreciating INR.

It is true that the RBI took actions and some corrective steps to curb a fall in the rupee. But the measures were temporary and would only yield impermanent results. As expected, the rupee appreciated for a day or two and then again started its downward journey. Today, it breached the Rs 62 per dollar mark. As India is a net importer the negative impact on the markets could be seen with bond yields rising to new highs. We are of the opinion that there will be good demand for the USD on account of fall in Indian equities. It is true that most on the street would be surprised due to what happened to the rupee. But our readers would not be surprised as we have been continuously and categorically stating that the rupee would continue its decline.  However, the extent of the fall in the rupee becomes a tad surprising.

Now this fall has considerable implications. India Inc has already witnessed a good amount of damage in terms of forex losses and its impact on the bottomline in June 2013 quarter can be clearly seen. Apart from that, the impact on the current account of deficit is an added worry. However what we are mainly worried about is inflation.

With the depreciating rupee, crude prices would be higher for oil companies. This rise would be passed on to retail consumers. This will only add to the inflation, as even a smaller price hike in diesel, impacts the transportation cost, which in turn, results in higher inflation. 

What next? Well, we expect the rupee to decline further as the equity markets have been witnessing FII outflow (after a huge sell-off seen in the debt segment). 

As regards to the markets tanking by more than 650 points today, we are not at all surprised. Rather in one of our recent editions of the Flash News, we clearly stated that the rise in Indian equity indices is a technical illusion and hence every rally should be sold at. Expect the markets to remain weak as we enter the next week.