Indices under strain due to weak rupee, rising oil prices; cautious investment approach to pay-off

Investors could park money in quality stocks having scalability, robust earnings growth visibility and a strong corporate governance track record

Elevated pressure on the Indian rupee and higher crude oil prices pulled down the Indian equity market with the key indices — Nifty and BSE Sensex shedding 1.4 percent each in the first 15 days on September 2018.

Indices regained some lost ground in the last two trading sessions in the previous week, with the announcement of the PMO convening an urgent meeting to take stock of current account deficit (CAD) situation and steps taken to arrest any further fall in rupee.

Domestic equities have already lost Rs 3 lakh crore in last nine trading sessions of the month. Mid-cap and small-cap indices were also the victims of mayhem with the Nifty mid-cap 100 index and Nifty small-cap 250 index losing 2.7 percent and 3 percent, respectively by September 14.

Tumbling rupee & soaring oil prices raise concerns over CAD

The 1.7 percent depreciation in the rupee against the dollar to Rs 72 in the month so far and crude price surpassing $80-mark raised concerns over the country’s current account deficit.

Higher oil prices with the weak rupee could prove to be a double whammy for the economy, as India imports over 75 percent of its oil requirement. Though the CAD marginally eased to 2.4 percent of the GDP in 1QFY19 led by contraction in gold imports and NRIs remittances, it may go up in case rupee continues to reel under pressure.

Notably, post withering away of rupee overvaluation in Real Effective Exchange Rate (REER) terms, any further weakness can have a major impact on the economy. Fear on higher CAD has already led to flight of Rs 9,400 crore of FPIs’ (foreign portfolio investors) money from the Indian markets in September 2018 so far.

Further slide in rupee appears unlikely

Given recent measures taken by the government to remove caps on foreign holdings on corporate bonds and no withholding tax on Masala Bonds are likely to extend support to the rupee and arrest rising bond yields.

Further, the government’s plan to put restrictions on imports of non-essential items is likely to arrest CAD. In case, these measures would not be adequate to arrest further slide in the rupee, the Reserve Bank of India (RBI) has the option to come up with NRI Bond programme.

Hence, we don’t see any major depreciation in rupee. Further, considering favourable consumer inflation (CPI) at 3.69 percent for August 2018 (below the RBI’s reference range), we do not expect the RBI to hike rates in upcoming policy, unless real interest rate between India and the USA shrinks below 100 basis points (bps).

Cautious investment approach is still advisable

Despite the uncertainty over global and domestic event, we still maintain our stance that the investors should maintain a cautious approach. Various developments across domestic and overseas markets may erode their capital and, therefore we advise investors to invest in quality stocks having scalability, robust earnings growth visibility and a strong corporate governance track record. We still believe consumption story in India will continue to shine with the government’s continuous thrust to revive the rural economy.

Disclaimer:-The views and investment tips expressed by investment experts are their own. Ripples Advisory advises users to check with certified experts before taking any investment decisions.

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