What Happens When 70 Becomes The New 60 For Rupee
There might be a silver lining to the weakness in the Indian rupee against the U.S. dollar.
Profits of the Nifty 50 companies are likely to improve if the currency falls another 6 percent and breaches the 70 per U.S. dollar mark, according to a Credit Suisse report.
A decline in the rupee to 72 from 68 against the dollar would push Nifty companies’ profits for the current and next financial year by 4-4.5 percent as more than half of Indian companies do not earn in the local currency, said the report titled ‘When 70 becomes the new 60’.
This includes exporters like pharmaceutical, information technology and auto-component companies, along with metal producers and refiners, which stand to profit from a depreciating rupee. On the other hand, sectors such as cement, paint, fast-moving consumer goods and telecom may take a hit, the note said.
The rupee breached an all-time intraday low of 69 to the dollar against the greenback late last month. It has weakened 7.68 percent against the greenback in so far in 2018, making it one of the worst-performing currencies in Asia this year.
Rupee And Inflation
The implications of a weaker rupee will be quite different on India’s inflation. Rising prices are already a matter of concern for the Reserve Bank of India’s monetary policy committee which hiked interest rates by 0.25 basis points in its last bi-monthly policy. Economists expect at least another hike in 2018.
A 6 percent fall in the rupee will lead to a 21-42 basis point rise in inflation, as the higher costs of fuel and precious metals get passed on to consumers, the report said.
A weaker rupee “impacts the trade deficit through feebler local demand, as only a sixth of India’s goods imports are due to lack of cost competitiveness (rest due to unavailability or incapacity),” the report said. Only sectors with significant value addition – such as agriculture, textiles, leather and two-wheelers – will benefit, it added.