Currency paradox: Rupee's gain aids macro outlook; risks India Inc earnings

The sudden appreciation of the Indian Rupee poses a threat to corporate earnings, even as it supports broader domestic macroeconomic indicators, according to analysts at Kotak Securities.

 

The rupee has seen a fair degree of volatility, Kotak Securities said in a note, highlighting a shift in sentiment, from earlier fears of it sliding to 95 against the dollar, to current expectations of an appreciation towards 80 or stronger.

 

The currency has appreciated for two consecutive months to fall under the 84 mark, buoyed by inflows into equities. However, the local unit was hit with further volatility as tensions flared between India and Pakistan, following the terror attack in Kashmir last month. 

 

 

The currency has depreciated by over 3 per cent since March and currently trades at 84.8 against the greenback. 

 

The "sharp and sudden" appreciation in the rupee and the "erratic" downward movement of the dollar versus other currencies pose further challenges to investors, analysts at Kotak said in a note. "On the one hand, a stronger rupee may be positive for domestic macroeconomic parameters, but on the other, it could be negative for earnings of the commodity and export sectors." 

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IT, metals to see most impact

 

Analysts expect the earnings of India Inc. to be negatively impacted due to the high share of profits of the commodity and export sectors versus the profits of sectors that are consumers of commodities in the listed space. In particular, several heavyweight companies and sectors like information technology (IT) services, metals, mining, oil, gas and consumable fuels) will see a deep cut in their earnings, the note said.  

 

However, any meaningful appreciation in the currency will be a positive for the balance of payment (BoP) and current account, inflation and fiscal deficit, Kotak Securities said. India may see large savings from lower prices of imported energy, it added. 

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The research firm also expects a strong currency to benefit consumers of commodities. Companies in the automobiles, commodity chemicals, construction materials and real estate sectors will likely benefit from lower global commodity prices, it said. "However, we would note that the domestic market structure will also influence companies’ abilities to retain the benefits of lower raw material prices."   

 

Dollar set to see further depreciation

 

Analysts noted the erratic movements in global currencies, driven by knee-jerk market reactions across bonds, currencies, and equities to fresh macroeconomic data and developments. "A consensus appears to be forming around further depreciation of the US dollar, driven by a recalibration of the dollar to the underlying US macroeconomic fundamentals and declining investor confidence in US assets and policy direction." 

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The dollar index — a measure of the value of the US dollar relative to a basket of foreign currencies — was up 0.45 per cent at 100.06. The index recorded its steepest monthly drop since November 2022, falling over 4.5 per cent in April after a 3.4 per cent decline in March.

 

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