Long-term fix: Why the rupee will drift down the weaker path

The current account has structural weaknesses; dipping into reserves or raising fresh dollars may not help.

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RBI has expended close to $19 billion to stave off downward pressures in the year-to-date, but still ended up with an almost 8% fall in the rupee’s value against the dollar. Estimates of `70-71 to the dollar are doing the rounds, while analysts debate over the likely measures authorities might take to bridge the external financing shortfall for a widening current account and short-term liabilities due later in the year.

However, even as policymakers may find ways to bridge the gaps, the rupee will continue to drift down the weak street. This is because of structural weakening of each component of the current account, including long-term solid supports such as software exports and foreign remittances—a development particular to the current decade.

Why is  this important??

  • The rupee has hit an all-time low against the dollar, creating serious problems for Indian economy already battling multiple headwinds. The rapid decline threatens to undermine the recent gains in inflation and depress badly needed capital flows.
  • With India importing most of its oil needs, any rise in prices means more dollars are needed to buy the same amount of oil. As US rates go up, investors who borrowed at a cheaper rate find returns from investing in India not worth the risk. If US G-Sec returns at 1.5 per cent made buying Indian G-Secs at 7 per cent a good investment, US yields at 3 per cent make Indian bonds at 8 per cent less attractive. Borrowing to invest in India also becomes expensive.

Stocks to be impacted.

These include pharmaceutical and information technology that earn a big part of their revenues in dollars. Every dollar earned through exports means more rupees added to the bottom line.,

TCS (CMP: Rs.1871, Market Cap:Rs.7,16,862.42 cr,  FY2020 PE:  21.88x)

Infosys(CMP:Rs.1344.6, Market Cap:Rs. 2,81,533.98 cr, FY2020 PE: 17.28x)

Lupin (CMP:Rs. 939.2, Market Cap: Rs.42,455.95 cr, FY2020 PE:21.46x)

Cipla(CMP:Rs. 634.55, Market Cap: Rs.51,093.41 cr, FY2020 PE:21.6x)

Depreciating currency will adversely impact capital-intensive sectors and firms with foreign borrowings and those who import raw materials heavily. Automobiles, capital goods, petroleum, power and telecom companies will bear the brunt of a weak rupee.
What remains to be seen is whether the domestic industry will be able to remain profitable while balancing rupee depreciation.

Tata Motors(CMP: Rs.260, Market Cap; Rs.75,071.07 cr, FY2020 PE:6.64x)

Eicher Motors (CMP: Rs. 28103.25, Market Cap: Rs.76,627.16 cr ,FY2020 PE:23.24X)

Atul Auto (CMP: Rs.394.15, Market Cap: Rs. 864.89 cr, FY2020 PE: 13.24x)

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