The indianmillionpixel.com Blog

Rupee (INR) Appreciation Vis-à-vis US Dollar (USD)

What does rupee appreciation mean?

Rupee appreciation means USD is now cheaper than earlier. We can buy more dollars with the same amount of rupees. This is explained with an example: 

Consider a scenario where we have Rs.1000. Suppose that the exchange rate in Apr’07 was 45, while the rate in Apr’08 is 40. 

Dollars that you could have purchased in Apr’07              = 1000/45, or USD 22.22

Dollars that you could purchase in Apr’08                          = 1000/40, or USD 25.00

You can see from the above, that with the same amount of rupees, you can purchase more US dollars in Apr’08. This is called the appreciation of the rupee, or the depreciation of US dollar.

 How does rupee appreciation affect imports and exports?

 Importers buying from the US have to purchase USD to pay their vendors in the US. With the rupee appreciation, importers are able to purchase more dollars with the same INR. This is beneficial for them, as they pay lesser INR for the same dollar amount.

 Conversely, exporters end up getting a lesser amount of INR for USD received from their US customers, which means that the rupee appreciation adversely hits their top-line (sales or revenue) as well as bottom-line (profits).

malhotraa125@aol.com

Outlook for Stock Markets in India- ‘Near-Term’ and ‘Long-Term’

BSE sensex has been one of the most widely accepted parameter to judge the performance of the Indian stock markets. Sensex began in 1986 (with 1979 as the base year, set as 100).

 The Indian stock markets have seen quite a few ups and downs, as is the case with any stock market, which deals in equities. The markets have seen success stories that are real life examples of ‘rags to riches’. At the same time, there have been innumerable instances where people have lost all/most of their wealth in a bid to earn more from these markets, some even paying with their lives in the process.

In this backdrop, it is imperative that investors exercise utmost caution while investing their hard earned money. Though nobody can predict the future, we can always look at history to be a guiding factor.

Here’s my viewpoint of the performance of the stock markets; both near-term and long-term:

Near Term (Short-Term)

In the short-term (next one year), I don’t expect the markets to give the investors substantial returns. I say this, based on the following: 

1. Traditionally, the Indian stock markets have been influenced by the political stability factor. I equate the significant rise in the stock market indices over the last three years or so to the political stability that India has been fortunate to have. The index has grown from around 6000 at the time the current government took over, to more than 21000 in January this year, before taking a corrective step. Still the sense is hovering around the 17000 mark. With the political structure in India getting ready to gear up the upcoming general elections in just over a year’s time, we can certainly expect some political uncertainties to crop up. A stable political environment, both pre and post the general elections, would be a key to maintain the growth momentum.  
   
2. Foreign Institution Investors (FIIs) have had the biggest role to play in the growth of the stock market over the last three year period. They have pumped in huge sums of money and have directly contributed to the increase in floating fund available, which has gone a long way in ensuring that the sensex maintains its upward move. US FIIs have been facing liquidity crunch due to real estate issues in the US, which has caused huge sums of money being withdrawn by the US FIIs over the last four months or so. This has been a contributing factor for the sensex diving from 21000 to much below 15000, before recovering (with money put in by Indian financial institutions).  
   
3. US economy is facing a recession at this point of time. With their presidential elections due later this year, a lot of corporate money is and would be sucked up during campaign. Recessionary conditions, if continued for a longer term, might force the US corporation to ensure that fund movement outside the US are controlled, which might have an impact on the FII money inflow (trends already seen since January this year)

Long Term

In the long term, I expect the growth in the stock markets to continue. There would definitely be spells where the sensex would go down (sometimes even drastically), but I’m bullish on the prospects of the Indian stock market. I’m optimistic, due to the following: 

1. The Indian economy has been growing at a high single digit rate (almost touching double digits), since the last few years. This trend is expected to continue in the future too. This would lead to higher profitability for organizations, which will ensure that the momentum gained by corporate India is here to stay.  
   
2. I expect the dependence on FII money, which has traditionally been driving the stock markets, to decrease over a period of time. I say this, as the Indian institutions have begun to get their presence felt, and have been able to counter the withdrawal of FII monies to an extent (trends seen over the last 4 months or so). With time, I expect Indian institutions to be in the driver’s seat and control the market much better.  
   
3. India and China are the most prominent nations that are being fancied by the other counties for expansion. Given a democratic setup, India enjoys an edge over the Chinese market as far as attracting foreign funds for capital investment are concerned.  
   
4. India is set for an Infrastructural expansion. Most of the cities are witnessing this, and I expect this to move to the sub-urban areas in the years to come.  I expect this to lead to a cascading effect in the demand for core products like steel, cement, construction material, etc. This would lead to higher profitability for this sector, which would drive the progress of the nation. 
   
5. Services sector has been the most pampered by investors over the last decade or so. The trend is here to stay, with India Inc. carving out a niche for itself in the IT and outsourcing market. There has been competition cropping up, but I expect the Indian services sector to continue to do well and leverage the experience gained over the last decade, as this sector matures and consolidate. 

I would like to sign off by saying that it would be a good strategy to wait and watch in the near term and invest in sectors that hold promise for the future, like Infrastructure, Real Estate, Services, etc. to reap long term benefits.

malhotraa125@aol.com