A lot of times we come across reports saying how the rupee is appreciating or depreciating against the dollar. And whenever there are major movements in the currency market, the stock market is impacted.
But before understanding how the rupee movements affect the equity markets, let's first understand these movements.
Rupee depreciation means when the value of the rupee is falling against the US dollar. So for instance, due to any reason, the value of $1 rose from ₹50 to ₹60, this means the value of the rupee depreciated. More money in terms of rupee is now needed to buy 1 dollar. This implies the rupee has become weaker.
Similarly, rupee appreciation means when the value of the rupee rises. So if the value of $1 falls from ₹60 to ₹50, then less money in terms of rupee is needed to buy a dollar. This is rupee appreciation.
There are a lot of factors that affect the movement of any currency like economic uncertainty, growth potential, global factors, foreign investor investment, etc.
Like stock markets, the rupee also trades in the forex market on a daily basis. However, when there are large movements in the rupee valuation it massively affects the stock markets as well.
So let's understand how that works.
Generally, there is a proportional relationship between the rupee and the markets. When the rupee appreciates, it boosts the economy and the stock markets rise but when the rupee depreciates, it becomes a cause for concern leading to a fall in the equity markets.
When the value of the rupee depreciates, you get more money from exports but have to pay more for imports. So in such a scenario, generally export-based stocks thrive while import-based stocks decline.
Similarly, when the rupee appreciates, export-based stocks like IT fall and import-based stocks surge.
Which sectors are affected
As mentioned earlier, export-based sectors like IT, pharma, textiles, etc do well when the rupee depreciates. The revenue of these firms is mostly dependent on exports so when the rupee is trading at a lower price against the dollar, they are negatively impacted. They get less money for the exports when exchanged with dollars which then decreases their profitability.
While mostly rupee appreciation leads to a rise in the markets since it shows that the currency is in demand. A rise in the value of the rupee also showcases the potential for economic growth, attracting more investors.
However, one must note that a fall in these sectors may also lead to a fall in the entire markets momentarily. When IT stocks fall, they have a sort of domino effect since they have high weightages in the benchmark indices.
Meanwhile, sectors like oil and gas suffer when the value of the rupee rises. Since we import most of the crude oil we use, if the rupee is trading at a higher price, then it would take more money to buy the oil. This would increase the expenses of oil and gas companies leading to less profitability and a fall in their stock prices.
Other sectors which import raw materials like auto, metals, etc are also negatively impacted by the depreciation in the currency.
Apart from the decline in these sectors, depreciation of the currency may also indicate economic weakness and lead to a reduction in foreign investment, which may cause an overall crash in the stock markets.
Currency movements are generally small and gradual but a sudden major movement can deeply impact the market. But now that you understand which sectors are impacted, you can use it to your advantage while investing.