Indian Rupee has been on a tear in last few days. The equity market has had a good time before witnessing correction in last week of January 2021, ensuring to keep the INR elevated on the online currency trading platforms. The Rupee has been well supported in recent times as the broad spell of weakness in US dollar overseas boosted the local currency. As the INR stabilizes around its four month high under 73 per US dollar mark, it will be pertinent to take a look at what is driving this rally in the INR and what will be its likely impact on equity market investments.
INR had slumped in the middle of last year as the local equities tanked following the Covid-19 induced contraction in economic activity and resultant worries on the shape of the recovery as cases soared across India. However, the INR marked a sharp reversal and saw sustained gains local equities broke into fresh highs and overseas buying boosted appetite for local financial assets. Most stock market advisory services are projecting a continuing of gains for local shares
Indian equities witnessed an inflow of more than $23 billion from foreign institutional investors (FIIs) in 2020, the highest among emerging markets. This was the second year in a row when FII inflows into Indian equities were highest among emerging markets. In 2019, the inflow was $14.2 billion.
Let us first understand what drove the latest surge in the Indian Rupee. While the local equities had been on a strong pitch for bulk of the last two quarters, the real frenzy in the equity trading emerged after the local indices broke above their previous all-time highs in November 2020. Improved sentiments in business environment and ideas that the Covid-19 will keep the country`s current account deficit or CAD under check fuelled the rally in Rupee. A lower CAD means less demand for foreign currencies to bridge the gap.
Improving economic data and estimates of a v-shaped recovery in India also boosted the INR. In last two months, the Rupee witnessed another booster dose in the form of a weak US dollar overseas. The dollar index, which measures strength of the US currency against its major trading partners, fell under the critical 90 mark and tested around two and half year low. This benefitted the Rupee as well.
What does a spurt in Indian Rupee mean for local stock markets trading? Typically, companies in sectors like Information Technology, fast moving consumer goods and pharma are likely to be under pressure from a rising rupee due to dependence on exports. This means that a rising Rupee tends to moderate earnings of these companies. Other sectors like infrastructure and engineering goods tend to benefit from the appreciation in the Rupee as they import a plenty of raw materials and rising INR pulls down their cost of materials.
A rising Indian Rupee along with excellent FII inflows has so far played out well for the local equity markets. Broadly speaking, an appreciating INR also keeps the macroeconomic side supported by bringing down the cost of imports. India is a huge importer of various commodities, like crude oil, gold, base metals, edible oils etc. Rupee appreciation brings down the landed cost of imports of such commodities, thereby reducing inflationary pressures. However, given that some major sectors tend to witness adverse impacts due to sharp rise in the value of INR, a continuation in the current spurt in the Rupee could turn out to be a mixed bag for the local investors.
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