Investors believe that weakening INR is good for exports and hence it is equally good for exports oriented stocks. DSIJ Research Team finds out the relationship is not that linear between weakening INR and performance of export oriented stocks
The Indian rupee fell to its all-time low last month against US dollar, breaching the 69 per USD level for the very first time in its history. The rise in crude oil prices and the ballooning fiscal deficit took a toll on the rupee, which lost more value than most emerging-market currencies this year. In fact, the rupee has emerged as the worst performing currency in Asia in 2018 till date.
A depreciated currency functions as a direct subsidy for exporters, whereas it acts as an unpleasant tax for importers. China, given its strong exports, has been using the undervaluation of currency as a trade tool for decades. Hence, a general belief among investors is that a falling rupee, coupled with a strengthening of the US economy, will provide some cushion to companies that export products and services overseas, thus earning more foreign currency. Although, this argument is attractive, the perception is far from reality in the Indian context.
Before we dig deeper to find whether or not depreciation in rupee actually helps export-oriented stocks, it will be only appropriate to first understand the impact of the ongoing trade war on our currency and our exports.
Impact of trade war on rupee and Indian exports
The US government has imposed 25 percent levy on more than 800 Chinese products, which include electronic goods, industrial machinery, medical devices, auto parts, etc. In retaliation, China has slapped tariffs on about 545 US items, which include agricultural products, aquatic products and vehicles. Since India is not a major exporter of the products that have come under the US scanner in its trade battle with China, there is little chance for India to substitute Chinese exports to the US, at least for now.
Thus, in the emerging situation, we can expect the flight of capital from emerging markets to the US to intensify. This could result in depreciation of most currencies.
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