Crude to snuff gains from weak rupee, muted global demand to hurt exports

Tourism and hospitality, auto and aviation could see a demand crunch amid coronavirus; earnings from rupee depreciation to export-driven sectors such as IT and pharma could be limited

The coronavirus epidemic has not only shattered confidence of markets globally, including India (BSE Sensex has plunged by 1,336 points in the last four trading sessions), but has also hurt crude oil prices and the rupee. While the latter has lost over 1.5 per cent or Rs 1.11 against the US dollar in this week so far, crude oil prices are down about 22 per cent since the start of 2020.

These two parameters are key for countries like India, which imports around 80 per cent of its crude oil requirement. In fact, some stocks in sectors like paints, information technology (IT), pharmaceuticals, etc. gained up to 5 per cent on Wednesday in an otherwise bearish market. While paint companies' key raw material is crude derived and hence the expectations of gains from lower oil prices, IT and pharma are export-oriented. But the point is, how one should look at these parameters when the markets are witnessing a unique disruption due to coronavirus.

Firstly, likely benefits from low crude oil prices are being partly offset by rupee's depreciation. But, notably as per Siddhartha Khemka, head of research-retail at Motilal Oswal Financial Services, the market is now more concerned about the economic growth. Spread of coronavirus is expected to drag down the overall demand globally, which would also lower India’s overall exports.

Key sectors such as tourism and hospitality, automobile and aviation, among others are expected to see a demand crunch amid coronavirus. Even on Monday, OECD (Organisation for Economic Cooperation and Development) slashed global gross domestic product forecast for 2020 by a half percentage point to 2.4 per cent amid concerns over coronavirus impact.

This would also mean that any earnings support from a rupee depreciation to export-oriented sectors such as IT and pharma could get contained. In fact, how long the rupee remains weak needs to be seen. Pradeep Kumar, senior vice president-strategy at Elara Securities believes that “This time the rupee depreciation is not structural. It is an outcome of tactical moves as the market is moving to more strong and stable currencies like the US dollar.” He also believes the Reserve Bank of India could intervene if the rupee significantly weakens further.

Paint companies though could see gains if oil prices remain subdued. Their focus on the domestic market, where demand is expected to remain decent amidst a favourable shift in market share to organised players, auger well.

Overall, while experts believe that the market will start looking at these parameters once coronavirus concerns are behind, investors are recommended to not look at just rupee depreciation to pick stocks.