Mumbai: The markets are unlikely to move up in a hurry without the rupee’s tow because of the overhang of a depreciating currency. A weak rupee hinders fresh capital inflows unless risk appetite improves. Since April, the rupee has fallen 15%, touching a fourth month low of 53 per dollar on Wednesday as foreign institutional investors have removed $459 million from the Indian markets, during same period Sensex has declined 1%.
The quarterly correlation between the Sensex and the rupee has become stronger in the past few years. In the March quarter, the rupee climbed 4.3% and the Sensex was up 12.6% after the Reserve Bank of India’s intervention in the currency markets and the two tranches of liquidity injection by the European Central Bank which led to $9.2 billion foreign institutional inflows. Flash back to the December quarter, the rupee weakened 7.7% as the Sensex plunged 6% following US downgrade concerns and as India’s growth worries took centre stage which was compounded by twin deficits.
Religare Institutional Research in a recent report said, the quarterly movement of the rupee is mimicked by the Sensex or vice versa. The trend has become more prominent since 2008 when 78% of the times Sensex and rupee have moved together in a quarter against historically 69% of the times.
So will the weak rupee hurt markets this time around? A weak local currency hurts market rating more than it hurts market earnings, according to the brokerage. For foreign investors, a strong currency is very important in terms of market returns. In 2011 when the rupee was Asia’s worst performing currency, losses in dollar terms climbed to 35.6% compared to 24.6% in rupee terms. A weakening rupee swells the current account deficit and makes it difficult for corporates to repay dollar debt or raise money from abroad.
However, a weak rupee can turn out to be earnings accretive for companies like IT services and pharma with export revenues, and metals and energy dominated by dollar revenues. But companies with large forex exposure will take the worst hit. While India Inc.’s earnings are marginally positive on the dollar, a downside from de-rating due to weakening rupee could override the earnings upside, said Religare Institutional Research.
And this time around things could be far worse as Standard & Poor’s cut in India’s sovereign rating is unlikely to support equity inflows and the currency in the near term, said Barclay’s in a recent report.