1. Rupee depreciating: Why is it good for IT and pharma sectors

Rupee depreciating: Why is it good for IT and pharma sectors

An unexpected move by China — to devalue yuan by over 3.5 per cent in two days to support its exports, gave a jolt to both the currency and equity markets.

By: | Published: August 14, 2015 9:12 AM
weak rupee

An unexpected move by China — to devalue yuan by over 3.5 per cent in two days to support its exports, gave a jolt to both the currency and equity markets.

Even as the domestic markets were bracing for an interest rate hike by the US Federal Reserve and a resulting possible outflow of funds from India sometime in September, an unexpected move by China — to devalue yuan by over 3.5 per cent in two days to support its exports, gave a jolt to both the currency and equity markets. While the benchmark Sensex at the Bombay Stock Exchange has fallen by 2 per cent over the last three trading sessions the rupee fell 2.2 per cent and breached the 65 mark against the dollar to close at 65.10 on Thursday.

Keeping into account several uncertainties, both domestic and global, experts say that the equity markets will remainc volatile in the near-term and while existing long-term investments should be left untouched, investors can focus on some sectors that are likely to benefit from a depreciating rupee going forward and avoid those that may bear the brunt.

Rupee to remain under pressure

While China has already devalued its currency, it may not stop here. A report released by Credit Suisse suggests that yuan renminbi (RMB) may depreciate more because of factors like strong correlation between RMB strength and weakness in Chinese nominal GDP growth; acute producer’s price index (PPI) deflation and China’s net foreign assets of 44 per cent of GDP. Also the fact that a small devaluation in currency leads to capital outflows, could only put further pressure on the Chinese currency.

In that case, there are chances that the rupee is likely to remain weak. It is also expected to witness some pressure on account of an impending interest rate hike in the US over the coming months.

“If China keeps its currency devalued, then, to remain competitive, we have to let the rupee depreciate. I think that there will be a staggered depreciation of rupee,” said Pankaj Pandey, head of research at ICICIdirect.com.

There are others who agree to this and say that as of July 2015, the rupee was overvalued by 10.73 per cent in Real Effective Exchange Rate (REER) terms. “Policy makers in India may allow it to depreciate gradually by 5 per cent to about 67-level. RBI had $353 billion in forex reserves as of July 31, 2015, which is $20 billion more than a comfortable 8-month import cover. The INR may finally settle down in the 66-67 range in the near term,” said Jay Shankar, chief India Economist & director at Religare Capital Markets.

A report by India Ratings states that since US and EU emerge as the biggest export markets for India, there is an overlap in terms of geography. Also, since textile, gems and jewellery figure in among leading export products for both the countries, India may lose out if China improves on competitiveness.

Sectors that look good

Since India has an advantage in IT services and pharma sector, experts say that companies in the IT sector and pharmaceutical industry would see a positive rub-off of depreciation in rupee. In fact, over the last three trading sessions, the IT and the Healthcare indices at the BSE have risen by 3 per cent and 1.2 per cent respectively.

Companies in metal, textile, chemical and the banking (especially the public sector banks) sectors are likely to be on the losing side. The metal index on the BSE has lost 10 per cent over the last three days and the banking index has fallen by close to 4 per cent. “Public sector banks have exposure to metal companies and hence they will come under pressure as a result of weakening fortune of metal companies due to China devaluing its currency,” said Pandey.

A limited depreciating in rupee, however, is unlikely to take away the benefits of weaker crude. Market participants say that while the currency depreciation may be 5 per cent, the global crude oil prices have fallen by almost 20 per cent over the last few weeks and therefore the economy will continue to benefit on that account. “Oil marketing companies, though, may see some inventory losses because of the volatility in the crude oil prices,” said Pandey.

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