The Indian Rupee has been battered and bruised this year, tanking to reach fresh lows of Rs. 82.83 against the US dollar last week. The factors that contributed the most to Rupee’s downfall were the rise in prices and the aggressive rate hikes by the US Federal Reserve in order to bring down inflation to 2%.
Despite RBI’s continued intervention of selling forex reserves to support the Indian Rupee, the local currency has depreciated close to 9% in the last 1 year. After RBI’s recent monetary policy committee meeting outcome, the rupee found some short-term respite, however, it couldn’t hold those gains due to the widening trade deficit data that was published. Trade deficit increases due to a slowdown of exports and due to a rise in imports, predominantly the surge in crude oil prices (as forms a significant chunk of India’s import basket).
Despite negative global cues, rising crude oil prices, and rate hikes by the US Federal Reserve, the Indian Rupee is the least depreciated currency compared to other major currencies mentioned in the above infographic.
While the Indian rupee has depreciated this year, the factors that have led to this downfall are more of an external nature than internal as India continues to perform well ahead of its peers on the macroeconomic front.
A common misconception: Exporters tend to benefit from a weak Indian Rupee – NO!
Imported inflation is a direct cause of a weaker rupee. However, there is a general misconception that a weaker rupee can benefit India’s exporters as consumer goods and services become cheaper for importers from foreign countries. Adding to the misconception, many experts believe that the Indian Rupee should be allowed to depreciate further/weaken for exporters to benefit and in a way help the Indian economy to stabilize without much monetary or fiscal intervention.
However, it must be noted that the Indian Rupee is not the only currency that has depreciated and the Indian economy is not the only economy getting affected due to external factors. Even other developed and developing economies’ currencies such as the Japanese yen, the Pound, the Euro, and the Chinese have depreciated more than India’s Rupee as seen in the above chart. The Vietnamese Dong remains the only currency to have performed better than the Indian Rupee. The depreciation of currencies belonging to advanced economies is mainly due to the expected slowdown as a result of high inflation and dependence on imported energy in those countries.
A 16% depreciation of the Euro against the 9% depreciation of the Indian Rupee reduces any or all of the comparative advantage that the depreciation of the Indian rupee may have had on its exports to the EU. European Union is the 2nd largest export destination for India’s exporters with close to 40% of the imports invoiced in Euros.
To summarize, the depreciation of the Indian rupee is expected to benefit some exporters from sectors such as automobile, apparel, and IT, however, a slowing global economy might have a greater impact, thus deteriorating the domestic macroeconomic environment.
Further, the current account deficit is expected to widen due to a slowdown in the growth of exports and a rising import bill.
How Should Investors & Traders React?
- Swing traders and intraday traders should continue to sit on cash due to the rising volatility. Avoid taking any leveraged-trades
- Investors must continue with their SIPs in mutual funds
- Prefer ETFs and index funds for large-cap equity and target maturity debt funds
- Consider taking a contrarian approach and watch out for rising yields. An8% risk-free return can augur well for many investors than a 9%-12% return in high-risk instruments.
- Lumpsum investments can be made at various intervals of market correction but only for the long term (advisable to consult a SEBI Registered Investment Advisor like Tavaga)
- Consult a SEBI Registered Investment Advisor
Disclaimer: Above write-up is only for informational purposes
