Fairval

Notes on Indian equities, sectors and economy

Rupee depreciation – not as bad as it looks

Posted by fairval on May 28, 2012

The rupee slide can actually be a huge positive for Indian manufacturers. Look at the extent of the rupee slide in this chart below:

Image

The rupee has slid massively in the last 4.5 years, from its high of around Rs 39 to the $ in Jan’08. The slide is against all major currencies – as high as 45% against the Yen, and 35% against the Chinese Yuan.

In the last one year, the Re has fallen the max against the Yuan, down 15%.

Some of this is perhaps a correction against past misalignment, what the economists called REER etc. But clearly a slide of this nature has to be a big boost to exporters. Pharma, chemicals, IT, even auto to some extent. These could go well. Infra, sectors exposed to domestic demand could underperform in the next 1 year, since domestic demand would be affected with high inflation and petro price hikes etc.

Caveats: There will be pain for borrowers, particularly who those who dont have commensurate exports. Also, if inflation remains rampant, these gains will be frittered away. Inflation control shud be govt’s top priority, not return to growth. There arent too many options the govt has to control inflation, except keep interest rates high. That kills investment, but so be it. That’s a price to be paid for getting out of this rut.

The big problem is that Inflation control, fiscal prudence –  these are terms which the UPA govt forgot a long time ago.

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One Response to “Rupee depreciation – not as bad as it looks”

  1. […] Rupee depreciation – not as bad as it looks […]

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