Which sectors are affected by rupee fluctuations?

The stock market is at a record high. GDP growth figures for the second quarter of FY24 was encouraging. Foreign investors are gradually returning to the market. Dollar index has also significantly declined. However, despite all this, the Rupee is consistently weakening. The reason behind this is the settlement process being carried out by the importers and exporters. The RBI’s focus is on increasing dollar reserves.

Amidst all this, on November 10th, the rupee touched a record low of 83.49 On December 4th, it closed at 83.42 against the dollar. Prior to this, on November 30th, the rupee had closed at 83.35, which was also a record low levels! How does the weakness of the rupee impact different sectors? What is the outlook for the rupee going forward? Can investments be made in specific sectors or stocks based on the rupee’s weakness and outlook?

Many sectors generate a significant portion of their income through exports. a weaker rupee is generally considered favourable for exports.

The basic reason is that a depreciation in the rupee makes Indian products more affordable in the global market.

Contrary to this, there are sectors that get impacted due to the weakness of the Rupee. These sectors are dependent on imports.

Now let’s first see those sectors that are impacted by the depreciation of the Rupee:

Sectors with global presence benefit from the rupee’s weakness. Among these, the first and largest sector is IT. Companies like TCS and HCL Tech earn almost their entire revenue from abroad.

TCS generates only 5% of its revenue from India. In other words, a significant portion of the revenue of these companies comes in dollars or foreign currency. This way, the rupee’s weakness leads to an increase in their revenue in terms of rupee.

However, rupee’s weakness is just one factor. Besides this, customer spending on IT sector, economic growth rate and other factors also impact IT sector’s growth. Additionally, a significant portion of revenue of pharmas comes from US, UK, and African countries.

Therefore, rupee’s depreciation leads to an improvement in the consolidated revenue of companies. To calculate a company’s consolidated revenue, all subsidiary companies’ revenue is added to the parent company’s revenue.

“For these companies, American drug regulator, FDA’s approval, for manufacture of drugs and operation of plants is crucial. Supply of raw materials and their prices play a significant role. Additionally, companies associated with oil and gas production, such as ONGC, Oil India, Vedanta, and Reliance would also benefit. This is because the prices of their products are determined based on international market rates.

However, there are sectors that are adversely affected by the weakening rupee.

In particular, oil marketing companies or OMCs are prominent in this context.

Our country imports more than 80% of its crude oil requirements.

This means that with the depreciation of the rupee, crude oil imports become expensive, putting pressure on margings of OMCs. Apart from the exchange rate, oil price is also crucial for this sector. If the rupee weakens along with a slight reduction in crude oil prices, it may not significantly impact OMCs.

But if the rupee weakens while crude oil surges, it will result in double blow for companies like IOC, HPCL, and BPCL.

Furthermore, FMCG companies also import commodities like edible oil, their operation costs increase due to a weaker rupee.

If these costs are not passed on to consumers, it puts pressure on the operational margins of companies. However, factors like monsoon, rural demand, and consumer preferences also play a significant role. Similarly, cement companies are also affected by a weaker rupee.

Another category is foreign companies that operate in India through subsidiaries or franchisees.

Those who need to pay royalties abroad. Among these are HUL, Maruti, Devyani International, Sapphire Foods, and Jubilant Food. These companies make payments in dollars, yen, and other currencies.

If the rupee becomes weaker, then such companies have to make more payments in rupees. This affects their margins and profits.

Share market expert Ambareesh Baliga believes that companies that import raw materials would suffer losses if rupee becomes weaker. However, recently, due to reduction in commodity prices, weakness of the rupee has not had a significant impact on marketing companies.

Now, what is the outlook for the rupee going forward? And based on this, what investment strategy can be made for which sectors?

Baliga believes that the rupee should not see further depreciation due to dollar inflows. The focus is on India becoming the third-largest economy by 2030. This could stabilize or strengthen the currency. In coming years, focus will be on IT, Pharma, Light Engineering, Textiles, Speciality Chemicals, and Defence companies. Therefore, consider long-term investment with targets of ₹1,400 rupees in Bharat Forge, target of 2,800 rupees in Deepak Nitrite, ₹195 rupees in Welspun Living, and 4,400 rupees in TCS, he advises.

Based on overall fluctuations in the rupee. Investment strategies can be made for various sectors.

However, this is not the sole factor. Besides this, there are many other factors to consider when you make investment decisions.

In case of any doubt, you can also seek advice from investment advisors