Rupee's depreciation pace, not level key for markets, shows 18-year history

It wasn't long ago when rupee projections at 100 versus the dollar made headlines this year as crude oil prices spiked to $120 per barrel. As seen in the past, currency debates often become fixated on psychological levels, yet history suggests markets care less about those milestones than about what they imply for the direction of macro risks. 

 

For the world's third-largest oil importer and consumer, India, a falling rupee presents unique challenges: a weaker economy, wary foreign investors, and declining earnings quality. 

 

But according to a study by Elara Capital based on an 18-year history, what moves the Nifty is not the rupee level, but the year-on-year (Y-o-Y) change in depreciation intensity. 

 

Markets have historically absorbed roughly 2–3 per cent annual rupee depreciation without major disruption. The turning point is when depreciation accelerates. 

 

Garima Kapoor, deputy head of research & strategist at Elara, said, "At 2–3 per cent annual depreciation, the long-run average is absorbed comfortably by equities. The inflection point is when the pace rises materially vs the previous year." This is because the market reacts to a deterioration in macro conditions that rapid depreciation usually signals.

 

Data shows that when median rupee depreciation climbed to 7 per cent in 2008 versus 2 per cent in the previous year, Nifty returns compressed to 4 per cent vs 20 per cent earlier. The reverse is equally important: when forex stress eased, median rupee depreciation reversed to 2 per cent and Nifty returns recovered to 20 per cent.

 

Rupee fall impact on Nifty

 

Kapoor, along with her co-author Saharsh Kumar, noted that a worsening FX impulse affects equities through macro, flow, and earnings channels. First, a sharper rupee weakness often follows elevated oil prices and a widening current account deficit (CAD). Second, FII positioning turns defensive as dollar-denominated returns erode even when local prices hold, triggering outflows. Third, earnings quality deteriorates, as imported input costs threaten margins and the bottom line. 

Rupee & Nifty 50 outlook

So far this year, the rupee has emerged as one of the worst-performing emerging market (EM) currencies, as it has lost 7 per cent against the US dollar amid a crude oil spike due to the West Asia crisis.

 

Amid fresh tensions between the US and Iran, the rupee has again slipped below the 96 mark vs USD, reviving imported inflation and external sector risks. According to a Bloomberg report, central bank stepped into the foreign exchange markets to support the rupee after the currency weakened toward a record low. READ MORE

 

Going ahead, G Chokkalingam, founder of Equionomics Research, expects the rupee to appreciate. "I'm 100 per cent confident. Once the West Asia conflict is resolved and confidence returns, oil will crash back to $60. So a 30–40per cent fall in oil prices will save around $30–35 billion in foreign exchange. It will also have a multiplier effect in terms of lower inflation and better corporate earnings," he added.

 

He further expects markets to still end positively this year. On a year-to-date (YTD) basis, Nifty 50 is down 7.5 per cent and on track to post its first annual fall after a decade of positive returns. 

 

After two consecutive years of above-trend rupee depreciation, even a moderation in depreciation intensity can act as a macro normalization signal, Elara Capital observed. 

 

"With Q4FY26 and Q1FY27E earnings breadth improving, SMID profit growth leading the recovery, and Nifty50 one-year forward valuation closer to long-period average, we believe the risk-reward is turning more favourable for a CY27 beta trade, including potential FII re-entry," added the brokerage. 

 

Disclaimer: Views and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers' discretion is advised.