IT, pharma to gain most from rupee fall; don't jump to buy yet: Analysts

India's Information Technology (IT) services and pharmaceutical firms may emerge as key beneficiaries of the rupee's recent slide, believe analysts, if the pressure on the currency continues to persist.

 

The currency, which slipped as much as 0.94 per cent to hit a record low of 89.54 per US dollar amid a delay in trade deal with the US and fading hopes of a Federal Reserve rate cut, could touch 90 per US dollar in the near-term, they predict. 

 

A falling currency, typically, aids companies that earn a large share of their revenues in dollars while incurring most of their costs in rupees. "IT services clearly stand to gain, given that 70-90 per cent of their earnings come from clients in the US and Europe, while their employee costs are rupee-denominated," Ajay Bodke, an independent market analyst, said. "Pharmaceuticals, with the US as a key market, could also benefit from a softer rupee. Other export-dependent sectors like textiles may see some support as well." 

   

IT services stocks, and import-substitute companies are likely to be the key beneficiaries of a weakening rupee, according to G. Chokkalingam, founder and head of research at Equinomics Research. Between the two, import-substitute firms stand to benefit directly from higher landed costs of competing imports and from government measures such as anti-dumping duties, he said. 

 

He noted that most other export-oriented sectors may not gain meaningfully, given India's stagnant export growth, the high import intensity of several industries, and uncertainty around potential US tariff actions against India.

 

"In contrast, sectors reliant on imports, like oil and gas, and aviation, could face pressure. Paints and FMCG players may also see higher costs due to imported raw materials such as titanium dioxide and crude-linked packaging inputs," Bodke said.

 

"Electronics manufacturing services (EMS) companies, which import a large share of components and sub-assemblies, could also be hit," he added.

 

On the bourses, Nifty IT advanced over 1.5 per cent on Monday, while the pharma index traded with mild gains. Textile stocks were trading mixed.

Rupee to test the 90/$-mark?

The sudden unwinding of risk trades is weighing on emerging-market currencies, including the Indian Rupee, Anindya Banerjee, Head of Research – Currency, Commodity and Interest Rate Derivatives, Kotak Securities, said.

 

"In the near-term, a combination of risk-off flows, a firmer US Dollar Index, and trade-deal uncertainty could keep the bias upward, with the pair potentially testing the 90.00-mark. For now, traders are watching a broad spot range of 88.70–90.30," Banerjee said.

 

Fundamentally, he believes the domestic currency remains undervalued relative to its peers on a REER (real effective exchange rate) basis, but a positive catalyst is needed to close that gap. "A successful conclusion of the India–US trade agreement could be that trigger," he added. 

 

That said, the current decline in the rupee is not alarming as long as the fall remains gradual, analysts noted. So far this year, the Rupee has fallen by 4.13 per cent, the worst among its Asian peers. This month alone, the currency has fallen by 0.43 per cent.

 

On Monday, the rupee advanced amid reports that the RBI resumed efforts to support currency via overseas and onshore markets. The rupee gained as much as 0.4 per cent to 89.08 per dollar.

 

India's inflation-targeting framework and improved fiscal discipline reduce the risk of a disorderly slide in the currency, Bodke said. The Reserve Bank of India (RBI) is focused on anchoring inflation, and the government has shown commitment to fiscal responsibility. Retail investors need not alter their asset allocation solely based on the currency’s recent move unless the depreciation turns steep and persistent, he said