Did you know 44% of the stir caused in Sensex over the decade can be connected with the movements in rupee? The rupee movements and the Sensex are so closely knit that they move towards the same the direction, if one goes down the value of other depreciates too. Both are affected by similar factors like governance, economy, trade surplus and deficit, foreign institutional investors’ (FFI) outflows and inflows, monetary policies and forex reserves.
How falling rupee can impact the capital market?
Fall in the rupee has a rough impact on the capital market; it increases costs but lowers returns. The FFIs lose interest in investments, which further discourage foreign capital and ultimately turn the stock market volatile.
Let us quickly take a look at the impact of fall in rupee on the capital market:
Foreign and domestic Investors: The effect of depreciation in currency is not very favourable for the investors; the interest on their savings lower turning them less keen to make future savings, which means a considerable reduction in investment leading the whole ordeal towards real time loss to the entire economy.
Debt: The FFI outflow can increase the yields from the debt market, which eases the repayment of short term loan but tempts the borrowers to add more debt to their portfolio. It constricts investment and further lowers the value of rupee; eventually, the defaulters find it difficult to pay off their debt on maturity. This entire process drains the economy further, during this phase it’s advisable to hold on to long term debt papers and funds.
Equity: During this time the importers tend to suffer, while the exporters benefit significantly. The fall in currency is risky for the oil marketing companies and the companies with high foreign debt. Even the fiscal deficit tends to worsen due the fall. To remain on the safe side, choose defensive sectors like pharma, IT and FMG over rate sensitive real estate and infrastructure; you should divert your attention towards private sector banks or PSU Banks with quality assets as the depreciation will also lead to the compound of asset quality issues.
Gold: Gold accounts for a major chunk of Current account deficit and therefore the government may create bottlenecks for gold loan companies, to accelerate its import. During the fall, the investors with limited strategic exposure to gold should continue to hold on to it.
Real Estate: The impending rate cuts in interest by RBI reduce the demand and power of builders. Even the rise in the cost of building material increases the price of real estate during inflation. Mostly the NRIs, who are among the major the consumers of real estate in India seem to be benefitted by the fall.
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