In layman’s terms Stock Markets are closely related to the value of US Dollar in Indian Rupees and primarily affects companies that deal in foreign trade. Although this may be a very crude as a statement for any stock market guru but it serves its purpose about explaining as to how the rupee value of the Dollar is related to the performance of the stocks of such companies.
Before we go further explaining more about this, let us take a look back at two crucial facts that we had established earlier:
1. When the rupee is appreciating (which means $1 now costs less in Indian currency) it becomes lucrative for companies to do imports and not a good deal for companies that export goods abroad. Read More →
2. When the rupee is depreciating (which means $1 now costs more in Indian currency) it becomes lucrative for companies to export good out of the country and it becomes more expensive for companies to import things into the country. Read More →
So, companies that import crude or palm oil derivatives to be used as raw materials, from abroad, will have to bear the brunt of paying more when the rupee depreciates. These industries are the ones like the plastics, paint industry, FMCG and others. If you are having stocks of such industries or companies that deal heavily in imports are likely to perform not very well during this period of time.
However, such companies are likely to post good results when the rupee appreciates and as a retail investor you might expect good profits in terms of share value growth as well as dividends.
Now let us consider companies that mainly export goods to other countries. For such companies when the rupee is depreciating, they will report better results as they are bound to earn more after the conversion of these US dollars earned, to indian currency. And as expected, these companies wont perform very well when the rupee is appreciating. Companies under the IT sector and the Pharmaceutical sector fall under this category.
image source – siliconangle.com