The Indian rupee has seen a steep fall in the last few weeks. In fact, the run from Rs68 to 72/$ has been really rapid. The graph below captures the gist of the rupee movement since the beginning of the year.
What is causing the sharp depreciation of the rupee?
When the rupee started depreciating, the immediate response was to say that it would boost exports. However, with the rupee getting to 72/$, the export celebration is being subdued by the real worries over the import bill. There are quite a few factors responsible for the weakening of the rupee. The primary reason has been the rise in crude oil prices.
Since India imports ~80% of its crude oil requirements, any rise in price will lead to a higher trade deficit. That is already obvious with the trade deficit shooting up to $18bn in the month of July 2018. When the trade deficit rises, the current account deficit (CAD) also increases (CAD is getting closer to 3%). Higher CAD is like borrowing for your morning breakfast leading to increased borrowing and this further weakens the rupee. As of now, nobody is sure of how low the rupee will go. So, what happens if the INR dips to 75/$? What should be your investment strategy then?
What should be your stock strategy if INR touches Rs.75/$?
A sharp fall in the rupee is rarely very great news for the economy as a whole. But then the market is all about opportunities, and there should be opportunities in the midst of a weak rupee too. Let us look at few such opportunities.
Export stocks will be the obvious beneficiaries. We have seen pharma and IT stocks rally quite sharply in the last few months and that is largely on the back of a weak rupee. A weak rupee means a stronger dollar. That means that each dollar that these exporters earn will deliver more in INR for them and that is a big advantage.
In the IT space, many large caps may be priced close to their peak average ranges and hence it may be a better idea to focus on mid-cap stocks in the IT space.
Let us focus on pharmaceutical stocks. Pharma stocks corrected sharply in the last few years and have shown the first signs of bottoming out. There appears to be a degree of stability in the way the FDA issues have been managed. Several pharma companies such as Aurobindo are already adopting the inorganic route and these US-focused pharma companies may be a lot more attractive if the INR goes to 75.
In addition, you must focus on the domestic players. The likes of Hindustan Unilever, Britannia, Marico, and Havells are essentially plays on the India consumer story and that is not likely to get significantly impacted by the value of the rupee.
Further, consumer goods companies typically tend to benefit from inflation as the price effect plays in favour of their pricing power. That will also work to their advantage. A strong dollar and a huge untapped market in India will force a lot of FMCG companies to penetrate deeper into the Indian hinterland. That will not only be a boost to FMCG companies but also an indirect boost to logistics companies as it will open up huge opportunities for them.
Finally, a word of caution. Debt is a bad word in these conditions, especially if the debt is largely dollar denominated. Ideally, you must avoid companies that are very heavy on dollar debt or companies that have a high import component. As investors you need to be cautious on such stocks.
The last market bottom was made when the rupee crashed sharply in 2013. From that level, the Nifty has doubled and specific stocks in the mid cap space have appreciated 10-15 times. A crisis has typically been an opportunity to indulge in selected buying in the market. The INR at 75/$ will be no different in terms of opportunities.