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Damned if you do, damned if you don’t! Rupee problem leaves D-Street puzzled

Saheli April 7, 2016 Business Comments Off on Damned if you do, damned if you don’t! Rupee problem leaves D-Street puzzled

NEW DELHI: Dalal Street has a rupee problem and no one is talking about it.

The domestic currency had depreciated 3 per cent against the US dollar till February end on the back of rampant FII selling in the early weeks of the year. Market experts at that time saw it as a boon for the country’s flagging export sector.

“A weaker rupee has not really impacted India, mainly because of the continuing softness in global commodity prices, especially in crude oil prices. Therefore,  the powers that be have not been too worried about where the rupee would end up,” said Killol Pandya, Head of Fixed Income, Peerless Mutual Fund.

In March, the rupee turned on its head to rise up to 3 per cent against the greenback as the dollar weakened in the light of a dovish commentary from the US Federal Reserve and a massive inflow to the tune of Rs 24,000 crore from foreign institutional investors.

In March, the rupee turned on its head to rise up to 3 per cent against the greenback as the dollar weakened in the light of a dovish commentary from the US Federal Reserve and a massive inflow to the tune of Rs 24,000 crore from foreign institutional investors.

In the past one year, the currency has declined 6.4 per cent on three major factors – the depreciation of the yuan, the appreciation of the dollar and selloff by FIIs.

Given the inter-linkages, the rupee needs to appreciate for equity investors wishing to see the stock market climb. While for exporters, the rupee needs to depreciate so as to aid his profits.

“The depreciation of the rupee implies a reversal in FII flow, which is hurting the domestic market. A sharp depreciation of the rupee would impact banks, capital goods and metals stocks,” brokerage CLSA said in a note to clients.

CLSA sees further depreciation in the yuan, which will hurt the rupee despite its better fundamentals. Ben Luk, Global Market Strategist, JPMorgan Asset Management, sees the depreciation in the renminbi to happen at slower pace than last year.

“We expect the renminbi to continue the devaluation trend, not the one-off depreciation that we have seen previously, but a gradual depreciation, because it has to keep at a trade-weighted constant basis compared with a basket of currencies,” he said.

Close to 50 per cent of the constituents in the largecap indices in the stock market are exporters. Depreciation in the rupee helps their earnings. CLSA believes that the very same depreciation in the currency will cause mayhem for banks due to their exposure to commodity-related companies.

Overall impact on banks is likely to be adverse, with their exposures to metals. Other large caps directly impacted would include BHELBSE 4.65 % and L&T due to imports,” it said.
Pandya sees the appreciating mode of the rupee reversing further, but rules out a complete rout. “I am not of the opinion that we will see a one way movement and breach 70-72, we might revisit the levels we had seen recently wherein we had breached 68 and moved towards 68.5,” he said.

That can happen due to any of the three factors – a fall in the yuan, weakness in the dollar or FII selling. The stock market can just be helpless.

[Source:- The Economic Times]

 

 

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