INDIAN RUPEE HAPPY TOO!

While the Indian stock markets continue to celebrate the historic victory of Modi, the attention has shifted a bit to the Indian rupee market.

The rupee has been struggling for the past few months, trying to find its feet but crude continued to act as a quicksand and sucking it further down was the uncertainty on the Indian political front. And now, crude is more benign, with prices crashing down and the Indian elections have given their verdict.

The rupee is now stable, and since the Exit Polls has been appreciating. On Friday, the rupee rose 47 paise against the dollar and this is a huge development because the US Dollar itself had been rising in value over the past few days. Trade tensions with China and overall turmoil in many markets had forced many investors to buy the US Dollar as a safe refuge for their capital.  But now with FII money flowing and expected to flow in big amounts into India in coming weeks plus the rally in the stock markets, both have now made the rupee look good.

The stock markets have shown their meteoric rise and it now awaits more triggers – formation of new Govt, who holds what portfolio and then the ultimate aphrodisiac, the Union Budget. So for now, the market are like a crouching tiger, waiting in anticipation of a bigger rally. And this sense of optimism has percolated down to the rupee, which has also appreciated against the US dollar, a phenomena which seemed impossible till a few months ago.

So what does this mean – when rupee falls, RBI steps in and even when rupee rises, RBI steps in? Well, a rupee fall is directly catastrophic as it increases costs all over, right from the petrol you fill up your tank with to the equipments and raw materials which companies buy. When rupee falls, importers cry while exporters make merry. The exact opposite happens when rupee rises – it bodes well for those having high forex loans as their MTM losses could narrow. When overseas debt has to be serviced with rupee earning in an appreciating rupee environment, the forex losses could be cirbed or there could be forex gains, depending on the hedging. Thus in this scenario, keep a watch on companies like Suzlon, Tata Power, PFC, JSW Steel, SAIL, Sesa Goa, Sterlite Inds, Essar Oil, Bharti Airtel, Arvind, Bhushan Steel, Lupin, Aban Offshore, IOC, Chambal, NTPC, Usha Martin, Shree Renuka.  But at the same time, export oriented companies earnings could get hit – IT, pharma, garments, electronics, engineering products, handicrafts, leather, marine products, carpets. The gems and jewellery exporters would have a mixed bag as the high import cost will surely come down due to rising rupee but if it rises too much, the net effect will turn negative. Thus like all things in life, too much of a rise or a fall is not good as sudden change hurts.

And that brings us to the most logical question on everyone’s mind – where is the rupee headed? This is as tricky as predicting the monsoon; we can only predict the trend based on the permutations and combinations available now. So as of now moods are optimistic and there is the promise of the economy finally moving out of the morass of policy paralysis. Thus this optimism means the rupee will remain around the same levels.

Most of the analysts concur that the rupee could be seen appreciating over the next couple of days but by year-end or even before that, we could see fundamentals catching up, leading to rupee falling. The worries over increasing trade deficit, slowdown in FII inflow, earnings showing the pressures of Q1, crude prices, all will eventually start weighing in on the rupee as the current euphoria settles.

All will depend on how the newly elected Modi Govt will get the economic growth going. If all policies are diverted to social welfare and doles, be assured, the rupee will start falling. It is widely expected that the rupee will end 2019 at Rs.70 by the end of the year.

At the end of it all, it is not Modi but strong macroeconomic measures which will work; once the economy indeed takes off as promised by Modi, which is a 2-3 year process, in the long run, if same sentiments continue, we can see surely see a more stable rupee, unless of course crude plays spoilt sport!