Rupee could slide to 74/$

The rupee has lost 9.98% since the beginning of this year, becoming the worst performing Asian unit.

Sep 06, 2018 10:09 IST IIFL Derivative Desk Raushan Kumar |

Rupee Crisis
After a robust rally of over 6% against the US dollar in 2017, the rupee has been knocked down hard against the greenback. The rupee has lost 9.98% since the beginning of this year, becoming the worst performing Asian unit. In fact, implied volatility, a measure used to gauge the future price movement of a traded currency, indicates that the Rupee could face wild swings if the global trade spat were to escalate further. 
 
Rupee could slide to 74, how?
Oil prices have been on the rise since mid-2017 and ever since WTI prices crossed $60 per dollar this year, the inverse correlation of the rupee’s fall with the oil price rise has been strengthening. 

WTI Crude Oil
70 71 72
MCX Crude Oil 5000 $71.43 $70.42 $69.44
5100 $72.86 $71.83 $70.83
5200 $74.29 $73.24 $72.22

As per crude calculation, a wide range of 69.44 to 74.29 remains open for the rupee. The probability of the rupee weakening towards 72.86-74.29/$ is high. Soon, on the back of rising oil prices, slowing foreign portfolio inflows, and the demand for debt repayment, the currency may slide to a low of 73-74/$.
 
What does a weak rupee do to the economy? 
The depreciation of the rupee has the potential to increase domestic inflation through the import route. On an average, oil constitutes about 25% of India’s total imports. The surging oil prices have seen the import bill increasing by 25% in FY-20118 to $109bn from $87bn in the previous fiscal. This, in turn, has pushed the trade deficit of $156.8bn in FY2018, the highest over the past five years. The current account deficit (CAD) will widen further because of the increase in trade deficit and the rising current account deficit will push bond yields higher.
 
What are the implications of the rupee’s sharp depreciation on stock market movement? 
There is too much noise that the rupee might be a spoiler in the sustainability of the bull rally but as historical data suggests, there is not much correlation between rupee depreciation and bear markets. That is, over Aug-Oct 2013, the rupee depreciated 17.6%, while Nifty rose 2.1%. In another instance, over Aug-Dec 2011, the rupee depreciated 22.7%, while Nifty fell 12.1%.  
 
How a weak rupee will impact India Inc.?
IT and pharma stocks stand to gain, while PSU oil marketing companies and aviation may lose. In general, a 1% movement in the rupee vis-a-vis the dollar helps margins by 25-50 basis points for domestic IT firms. Further, for pharma companies, many companies derive 60-100% of their revenue from exports. The US is the key market for these companies, accounting for 32-50& of their revenue. Hence, sustained rupee depreciation will further boost their prospects. 

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