The chart shows the close correlation between the INR/USD rate and the BSE Sensex. It takes the value of INR/USD and the Sensex at 100 as on 30 June 2009 and tracks the changes in their value since then. The correlation is unsurprising, given the dependence of the Indian equity market on foreign fund flows.
This time, though, while the bout of global risk aversion is no doubt responsible for the sudden weakening of the rupee, there are other fundamentals of the Indian economy which, too, have contributed to the currency’s weakness. A research note by Morgan Stanley points out that the total of India’s twin deficits (current account deficit + consolidated fiscal deficit, both as a percentages of gross domestic product) was at an all-time high for FY 2012, even higher than in FY 1991, the year of India’s great balance of payments crisis. Apart from the immediate impact of rupee depreciation in corporate earnings in terms of mark-to-market forex losses and higher outgo on interest and repayment of foreign loans, the lower rupee raises inflation, which restricts the central bank from reducing interest rates, keeping the cost of capital high and holding back economic growth. That, in turn, lowers the outlook for corporate earnings and thus affects equities.
Also See | Chart of the day (PDF)
PDF by Paras Jain/Mint