The stock market is sensitive to global and domestic economic cues. So, when the rupee value fluctuates, it impacts investors’ sentiment and the share market performance. The current jittery market and weakening rupee have affected the Indian economy. But, if you think it spells doom for the Indian market, think again.
Rupee depreciation means falling currency value, especially against the USD. But it is typically what several export industries, like the IT segment, rely on to improve their profit.
Currency exchange rate
In finance, the exchange rate refers to the price of one country’s currency against another nation’s currency. Under the floating exchange rate system, the cost of one currency changes against the other depending on supply and demand.
Currencies in the market are always traded in pairs, like USD INR, which represents the cost of one USD against the units of rupee.
Understanding rupee value fluctuation
The term depreciation implies falling rupee cost in a floating currency exchange rate system.
Hence, a depreciating rupee implies a weakening of the rupee against the USA or USD price increasing against the rupee.
Let’s understand with an example.
If the value of USD 1 increases from Rs 65 to Rs 70, we will say the rupee has depreciated against the USD.
Conversely, rupee appreciation means a rise in the value of the rupee against the USD or a rupee strengthening against the USD.
Example: The rupee is said to have appreciated when the value of USD 1 decreases from Rs 65 to Rs 60.
How the rupee appreciation affects the stock market
An appreciating rupee value indicates a robust economy. But it may result in a slump in the stock market. Let’s understand how.
When the rupee price appreciates, primary sectors like IT and exports take a blow. The IT sector is severely hit because a significant portion of its revenue comes from exporting its services.
Also read: Reasons behind Downfall for IT Stocks
With the appreciation of the domestic currency, exports become expensive and less profitable. Hence, domestic exporters are hit when the rupee cost increases against the USD. It will make export items from India expensive for foreign buyers. So, even if the item’s actual price doesn’t change for the buyer, it will translate into lesser profit for the Indian seller.
Hence, the industries that primarily rely on exports are affected by the rising cost of rupees, which may impact their share prices. As the industry performance stagger, it drags down the overall market. For example, when the IT sector share prices fall, it has a domino effect on the share market since the IT stocks constitute a chunk of the major market indices.
How rupee depreciation affects stock market
Usually, people associate the depreciating rupee with economic distress. When it is partly true, you may find the stock market performance improves in this situation.
It is because companies relying on export get a boost from the lower value of the rupee and book significant profit.
On the other hand, shares of companies depending on imports may tank. The depreciating rupee makes imports costlier. Hence, companies relying on importing raw materials, capital-intensive sectors, and foreign borrowing are hurt the most.
As a result, you will find the IT and pharma sectors to lead the market during the falling rupee cost scenario.
However, one must remember that the falling USD INR rate affects overall market sentiment and reduces foreign investment. Foreign investors withdraw from the market, which impacts the stock market performance as a whole.
In the floating exchange rate system, current rates depend on the supply and demand of the market. Although the exchange rate movements are small and gradual, these have an immediate effect on the stock market performance, which explains the current scenario. Remember that these effects are temporary, and the market will eventually adjust. If you plan to invest in the falling exchange rate scenario, carefully select the sectors which tend to react positively to the depreciating rupee value. Find suitable stocks to invest in with Angel One’s investment apps. Open Demat account with Angel One in under five minutes and start your investment journey.
Disclaimer: “This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock”