The Indian rupee’s recent tailspin spurred by the sharp sell-off in emerging market currencies, particularly the Turkish lira, has caught investors in a bind. The rupee’s fall breached the psychological Rs 70 mark after hovering for a long time around the Rs 69 levels. Equity and bond markets have come under pressure with the rupee now trading at Rs 70.11 against the dollar.
If the fall gets any more acute, financial markets are not going to take it smoothly. You could already see the signs of a small fall in the equity market. Equities tumbled by nearly 300 points in trading on Monday as bears pushed harder to gain an upper hand in market proceedings. A falling rupee can be seen as a dampener to market optimism.
The other reason why the rupee’s fall does not spell good news for the economy and the markets: foreign investors tend to shy away from currencies that falling pressing sales in domestic stocks and further exacerbating the tumbling equity prices.
Foreign investors tend to lose a lot of money when the rupee falls because they have to benchmark their returns to the dollar. If you look at the BSE S&P Dollex index, since January this year this index has returned merely 1.53 percent. This index reflects the BSE Sensex in dollar terms. By contrast, the BSE Sensex in domestic currency terms has appreciated 11.3 percent since January 2018.
IMPACT ON DEBT AND EQUITY
Portfolios could see a bit of more red if the rupee falls further, and does not stabilize quickly enough. Not only will the impact be seen in the equities markets, but the bond market could also feel the tremors as interest rates in the domestic economy could rise.
The 10-year g-sec surged marginally to 7.83 percent as per quotes on Bloomberg from 7.79 levels putting pressure on the bond markets. Bond prices are inversely related to rising interest rates and when interest rates rise, bond prices fall.
This also impacts the net asset values of bond and corporate funds. That means both debt and equity funds can tend to get impacted.
HOW TO PROTECT AGAINST THE FALL
If you haven’t done anything yet as a strategy, then don’t rush crazily into anything just yet. Take a step back and evaluate the situation and see how much of downside you can take. One of the best things to do whenever there is any financial crisis is to take a long-term view and ‘buy the dips’ or rebalance your portfolio towards equities whenever there is a, say, 5% dip.
Another strategy you could employ is to consider international funds, which diversify in assets other than the Indian rupee. For instance, the US-dollar based funds could be a good hedge in this market. The US market though has been moving sideways for a couple for months now but nevertheless, if there is a slow slide due to the ongoing trade wars having a small percentage of your portfolio in international stocks is advisable.
Lastly, look for sectors that are hedged against a fall in the rupee such as the IT sector. Over the past few months, Indian technology has emerged as a relatively good hedge in this market, both on account of the falling rupee and improving financials. A fall in the rupee improves the dollar earnings of these companies thereby improving the bottom line.
The S&P BSE IT Index has perfomred swimmingly well this calendar year, rising 32 percent. This is far ahead of frontline Sensex’s gains of 11 percent this year by a long mile. Going by the IT sector’s performance, there’s a chance that this outperformance will continue.
