Sharekhan Blog

Rupee Appreciation Depreciation Impact on the Stock Market

  • Jan 11, 2024

Many sectors benefit when the rupee gains strength, whereas others lose out. For instance, IT firms suffer as their export earnings reduce. However, oil companies gain as import costs decline.

The opposite happens whenever the rupee weakens. In the section below, we'll discuss how changes in the rupee affect different industries and stocks in India.

How Appreciation of Rupees Impact Stocks

Some of the major ways this impacts stocks are:

  • Information Technology - Since IT companies generate most of their revenue from exporting software services, appreciation directly hits their earnings and profits in dollar terms. IT stocks tend to decline as a result.
  • Pharmaceuticals - Pharma companies rely heavily on exports to regulated markets like the USA and Europe. Appreciation cuts their profitability from overseas sales. Pharma stocks fall.
  • Auto & Engineering - Players in the auto and engineering sectors export a significant portion of their output. The reduced competitiveness affects their profitability negatively. Share prices drop.
  • Oil & Gas - As imports become cheaper, firms in oil and gas benefit from lower input costs, which expand profit margins. Their stock prices may rise due to rupee gains.
  • FMCG - Appreciation makes imported raw materials cheaper for FMCG companies. This brings down costs and helps improve profits. FMCG stocks tend to benefit.

Overall, the export-focused sectors take a hit from rupee appreciation. But those reliant on imports get some cushion from reduced input costs.

Also Read: How to Buy your First Stock?

Effect of Rupee Depreciation on Stocks

Based on the rupee depreciation meaning, the key impacts are:

  • Information Technology - As revenue comes in dollars, depreciation helps boost the earnings and profitability of IT companies. IT stocks surge.
  • Pharmaceuticals - The competitiveness of Indian drug makers in foreign markets improves, leading to higher exports and profits. Pharma shares rise.
  • Auto & Engineering - The depreciated rupee makes exports more lucrative and profitable for companies in these sectors. Their stock prices move up.
  • Oil & Gas - Import bills for crude oil and natural gas spike higher due to depreciation. Profitability gets squeezed due to inflated input costs. Stocks decline.
  • FMCG - Costs escalate for FMCG companies as imported raw materials become expensive. This hits profit margins. FMCG shares fall.

Essentially, export-oriented sectors stand to gain during rupee depreciation. But those dependent on imports for raw materials are negatively impacted.

How Investors Can Manage Currency Volatility

Maintain sector diversification between exporters and importers to balance currency risk.

  • Focus on stocks with underlying solid company earnings rather than get fixated on currency swings alone.
  • Look for stocks with global operations and natural currency hedges. MNCs fall in this bracket.
  • Equity-oriented mutual funds help moderate currency risk through diversified portfolios.
  • Add international mutual funds to bring geographical diversification beyond Indian currency risks.
  • Exchange-traded funds (ETFs) allow focusing purely on stock performance by removing currency impact.
  • Remain invested long-term to allow quality companies to ride over shorter-term currency volatility.

How Should Investors React?

Here are some tips:

  • Maintain a balance between exporters and importers in your portfolio - This diversity hedges currency risk.
  • Focus on earnings growth more than currency swings - Ultimately, a company's profits matter most.
  • Pick stocks with pricing power - Companies that can pass on cost changes withstand currency volatility better.
  • Add stocks of MNCs like P&G and Coca-Cola which have natural currency hedges - Their global operations cushion forex impact.
  • Use mutual funds to moderate currency volatility - Diversified equity funds absorb currency fluctuations well.
  • Allocate some portion to international funds - Brings geographical diversification and reduces excessive dependence on Indian rupee.
  • Take a long-term view - Quality companies overcome shorter-term ups and downs over long periods.

The Bottom Line

The interplay between currency exchange rates and stock markets is dynamic. By grasping these dynamics of rupee appreciation and depreciation, investors can make informed decisions aligned with economic reality. A balanced portfolio, diligent stock selection, and patience are key to navigating periods when the rupee appreciates or depreciates substantially.

Team Sharekhan
by Team Sharekhan

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