At Rs 67.84 to the dollar (at Monday’s closing), the Indian rupee is approaching a record low.
The reason? Well two possibly...
Firstly, the massive selloff in emerging markets causing capital outflows from Indian assets is putting pressure on the rupee. And secondly, the increasing strength of the dollar.
Let’s take them one at a time.
According to Bloomberg, global funds invested in Indian markets have withdrawn to $1.2 billion from Indian assets in January. Most of this, thanks to the market turmoil, we have seen from China since the beginning of this year, and waning investor confidence about global growth.
The upside of globalisation is the interconnectivity of capital markets...but that can be its downside too.
Up until fairly recently, India faced capital restrictions. This meant that Indian capital markets were relatively shielded from global events. In recent times however those capital restrictions have been lifted, and India has become fairly well entrenched into the global economy.
That’s a good thing in so far as money from outside of the county can easily flow into our assets but it becomes less beneficial when it flows out, from our assets due to external global events. The most problematic outcome of these capital outflows is the jitters it causes that exert downward pressure on the rupee.
Add to that the issue of the appreciating dollar. Here’s how Rohan Lasrado, the Mumbai-based head of foreign-exchange trading at RBL Bank Ltd, explains it. “A lot of Indian corporates have taken advantage of quantitative easing in the US and borrowed in dollars. However, those days have come to an end and now that interest rates are slowly rising, Indian borrowers need to repay their dollar borrowings. The clamour for dollars is obviously then depreciating the currency.”
So what does all of this mean for you, the retail investor?
Well that depends upon whether you hold your wealth in rupees or if you also have dollars holdings.
If you are an Indian resident with no foreign interests then everything you spend on, you obviously spend in rupees. In this case you are mostly affected by price inflation rather than exchange rates.
That said, as Lasrado says, “The average retails investor within India has nothing much to worry about because as a rupee you are not importing high inflation. If anything, the RBI has been adamant about holding rates high to control inflation.”
For non-resident Indians, however, it’s a different story.
“Obviously a depreciating currency would help the NRI to get more rupees,” says Lasrado.
And that’s a good thing because most NRIs typically have significant financial interests in rupees.
There is however the flipside, regardless of whether you are a local resident or an NRI. If the rupee is weak, global investors are not going to want to invest in Indian assets.
This only exacerbates outflows from Indian equities. And once this happens then, you will lose money if you are invested in equities.
“Even though the retail investor has not really suffered on the exchange rate front, he has suffered on the equity front, especially if he has invested in mid-caps,” says Lasrado.
Double-edged sword? You could say so.
The writer is a financial journalist and author of ‘Money Smart: The Indian Woman’s Guide to Managing Wealth.’
