Russia's invasion of Ukraine has set off a chain reaction around the world, causing havoc on economies. The Indian economy is no different. The Indian rupee (INR) has dropped by 3.2 percent since the war began, while crude prices have climbed by around $30 per barrel.
The worst-performing Asian currency is the rupee, which has lost roughly 1.6 percent, followed by the Korean won and the Philippine peso, both of which have lost around 1.6 percent. On March 7 2022, Rupee fell to its lifetime low against the US dollar, at 77.01
According to data from the Petroleum Planning and Analysis Cell, the price of India's crude oil basket rose to $126.36 per barrel, its highest level since July 2008.
Furthermore, the weak rupee may have an impact on the Indian economy and stock market.
Here’s how a week rupee impacts the Indian stock market:
Importance of Dollar
The US economy is one of the sturdiest economies, making the US dollar one of the world’s strongest currencies. The US dollar is a global currency; it is accepted all over the world for international trade.
Many people regard it as a safe investment. Furthermore, countries hold the dollar in their central reserves as part of their monetary policy.
According to IMF (International Monetary Fund) data, the US dollar accounted for approximately 60% of foreign exchange reserves in most countries' central banks at the end of the fourth quarter of 2019. Furthermore, approximately 90% of global forex trading and 40% of global debt is denominated in US dollars.
The US Dollar Index compares the value of the dollar to six of the world's major currencies: the British Pound, the Japanese Yen, the Swedish Krona, the Canadian Dollar, the US Dollar, and the Swiss Franc.
If the index is high, the dollar is doing well, while a low index indicates that the dollar is weak. Though the Indian Rupee is not included in the index, changes in the dollar's index relative to other currencies have an impact on the Indian economy.
Any rise or fall in the price of the dollar has far-reaching impacts on the economies of other countries, including India. If we talk about the Indian economy, the Dollar price movements deeply impact different segments of the economy, collectively impacting the economy as a whole. Let’s learn how the dollar impacts the Indian economy in detail.
Effect on the Indian stock market
When looking at specific periods of rupee volatility, such as the 2013 rupee crisis or the 2018 rupee crash, the Nifty weakened in tandem with the rupee.
The value of the rupee is a key determinant of FPI flows, and these flows tend to turn negative when the rupee weakens or is expected to weaken, which has a negative impact on stock market indices.
If INR appreciates foreign investors get the opportunity to reap higher returns on their investments in India. This leads to an inflow of Foreign Institutional Investment (FII) and/or Foreign Portfolio Investment (FPI).
Due to the inflow of FIIs and/or FPIs, there is a buying pressure in the stock market, and the Indian stock market booms and becomes bullish.
FPIs and FIIs contribute to economic growth
With the dollar index falling, foreign investors see India as a lucrative investment opportunity to earn higher returns on their investments.
As a result, FPIs and FIIs flow into the Indian economy, contributing to economic growth. As the number of FPIs and FIIs increases, so does the flow of capital to companies from their international joint venture partners.
This enables businesses to grow and expand. Exports rise as well, resulting in a positive balance of payments position for the country.
Impact on Inflation
The Dollar index also impacts the inflationary trend in India. An increase in the Dollar index makes the dollar strong and depreciates the value of the INR.
A weakened rupee makes imports costlier and impacts India Inc.’s profitability due to increased production costs. Increased costs lead to inflation, and the prices of goods and services rise, much to the detriment of consumers. Thus, the overall GDP (Gross Domestic Product) is impacted and suffers a slowdown when the dollar strengthens.
Companies engaged in exports, on the other hand, benefit from an increasing Dollar index because they can earn a higher revenue in terms of the US Dollar. Companies that primarily export their goods and services, such as those in the information technology and pharmaceutical industries, become more profitable as the Dollar index rises, and vice versa.
Effect on companies with Dollar-denominated debt
For cost-effectiveness, many businesses have borrowed Dollar-denominated debt. These businesses are directly impacted if the dollar rises. Companies with Dollar-denominated debt pay more in INR to repay their debt when the US dollar is strong. As a result, such companies' profitability suffers, potentially leading to a financial crisis or even insolvency.