The rupee hit a new low versus the dollar, which is strong despite a faltering US economy. On offshore derivative marketplaces, the rupee exceeded 79 per dollar on Wednesday. Even India’s Clearing Corporation recorded transactions over Rs 79 per dollar. Despite RBI involvement, the rupee remains one of Asia’s weakest currencies.
Equity markets tumble along with the rupee. The benchmark Nifty fell from 18,604 in mid-October 2021 to 15780 today, a 17% decrease. The rupee depreciated 4.86 per cent from 75.34 to 79.
The strong link between the rupee and market falls has a straightforward reason. Foreign investors have withdrawn historic amounts from Indian markets.
A significant drop in the stock market nearly invariably leads to a weak rupee. The association is less evident when the market rises or remains flat.
Do foreign investment flows determine correlation, or do fundamentals matter?
40% of the Nifty consists of financial equities, which are unaffected by currency. IT and pharmaceutical industries profit from a weak rupee, but importers suffer. Commodity-based enterprises export their ultimate product, providing a natural hedge against currency swings.
As exporters, Nifty50 firms should gain from a lower currency.
Depreciating rupees make it tougher for foreign investors to break even.
An investor invests $1 million while the rupee is 70 per dollar. He bought a Rs 500 stock. After conversion, Rs 7 crore would purchase 140,000 shares.
Suppose the stock did nothing and traded at Rs 500 a year later, but the rupee depreciated to $75. If the investor wishes to withdraw his money, he’ll sell his shares and get $933,333.
To break even, the investment must outperform currency depreciation.
Weak currency often indicates a faltering economy. The foreign investor would like to withdraw his cash and rejoin the market when the economy stabilises. Foreign investors fleeing a falling currency isn’t surprising.
