A Steady Decline
The Indian Rupee hit a new record low against the dollar this
Monday. Falling to 61.21, the rupee was in keeping with the
weakness it has suffered in recent times.
The rupee first slipped below the psychological barrier of 60 to
the dollar on June 26. Since then, it has continued to slip, but
for the occasional session gains. This is attributable to two
Key Reasons for the Fall
The first of these is the weakest economic growth that the
country has experienced in a decade. In a report released this
week, the International Monetary Fund (IMF) has lowered its
projection for the country's growth to 5.6% in the current
financial year. This is marginally lower than its April estimate
The second reason is the alarmingly high current account deficit
of the country. The most representative measure of a nation's
international trade, it accounted for 4.8% of GDP in the last
In its report, the IMF has said that the tapering of the U.S.
Federal Bank's monetary stimulus could have serious implications
for developing nations. The most immediate impact would be felt
in the form of capital outflows.
A winding down of the bond purchase program is a direct result
of positive economic data from the U.S. This would result in a
flight of foreign capital. In June itself, $7 billion of
portfolio funds have exited the country.
A weaker rupee has a differential impact on various economic
sectors. Imports become costlier, whereas exports become cheaper.
Those companies which are heavily reliant on imports stand to
lose the most. These include the likes of
Tata Motors Ltd
On the other hand, exporters, especially those from the
outsourcing domain such as
) will gain from such an environment. They may be good additions
to your portfolio.
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INFOSYS LTD (INFY): Free Stock Analysis
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TATA MOTORS-ADR (TTM): Free Stock Analysis
WIPRO LTD-ADR (WIT): Free Stock Analysis
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Incidentally, Tata Motors has an expected earnings growth of 21%
and the forward price-to-earnings ratios (P/E) for the current
financial year (F1) is 7.28. Expected earnings growth for Infosys
and Wipro are 13.4% and 11.5%. Their P/E (F1) are 3.02 and 15.93,
Leading Indian banks will also feel the heat if the rupee
continues to fall. These include the likes of
HDFC Bank Ltd.
ICICI Bank Ltd.
). This is because a weak rupee would more or less rule out
prospects of a rate cut.
Interest rates have been maintained at a low level to combat
inflation, which has reduced somewhat only now. But a weaker
dollar would result in higher oil prices, a key trigger for
inflation, which is why the possibility of a rate cuts remains
The Reserve Bank of India (RBI) has now taken decisive measures
to combat the situation. It has imposed restrictions on the
derivatives market, focussing on currency derivatives. It has
prohibited banks from trading in domestic currency futures and
options. The Securities and Exchange Board of India has
significantly increased the required margin to be maintained on
dollar-rupee forward trades.
A significant amount of dollar demand is attributable to oil
companies. The RBI has directed these companies to purchase their
dollars from a single bank. It is believed that the fact that
such companies were seeking more than one quote was adding to
speculation and consequently, volatility.
With elections around the corner, the Indian government can
hardly afford to be complacent about the situation. Indian
finance minister P. Chidambaram is currently visiting the U.S. to
encourage companies to invest in India. These include the likes
Lockheed Martin Corp.
The Boeing Co.
Wal-Mart Stores Inc
Of course, such investments can only come about only if India
relaxes its FDI norms further. On the slate are plans to raise
foreign stakes in supermarkets to 74%. Similarly, there is a
proposal to raise the foreign investment in the defense sector to
The current situation is symptomatic of a phase when developing
economies need a fresh set of reforms. Though there may be some
opposition to such measures, they will, in all probability,
eventually go through.
And despite the current situation, India's long-term prospects
remain encouraging. This is equally true of its prominent
companies, including those mentioned earlier. If you're willing
to weather short-term volatility, Indian stocks remain a good
choice for the long term.