Rupee depreciation, if it continues, will likely pull the markets down further.
Since September 2024, the rupee has declined by 3.1 per cent, the Nifty has dropped by 8.5 per cent during the same period, and the Sensex has fallen by 7.3 per cent.
If the decline continues, markets will need to brace for more pain as it could push foreign portfolio investors (FPIs) to exit their positions faster than anticipated.
On Monday, the rupee was trading at 86.58 against the dollar, a fresh low amid a rising dollar and outflows from Indian equities.
The rise in crude oil prices, which increased the demand for foreign exchange, has put additional pressure on the rupee.
Brent crude was trading at $82.7 per barrel, the highest since August 12, 2024.
“As with any other currency, we are weakening against the dollar.
"The job market is strengthening in the US, bond yields have increased, and bond markets are optimistic about what Donald Trump will do to the economy.
"The dollar has strengthened against every currency, including the rupee, and it hurts the market as it reduces the returns of foreign investors from investing in India," said Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers.
The rise in oil prices on Monday, following a new wave of US sanctions against Russia’s energy industry, has compounded investor concerns.
“Rupee depreciation, along with oil price appreciation, will be more painful.
"If oil stabilises, the impact of rupee depreciation will not be as significant.
"All of this happens when the Union Budget is due, and that’s all the more reason for FPIs to take some risk off and sit on the fence.
"But one thing is obvious: currency depreciation is negative for foreign investors because they lose value immediately,” said Chokkalingam G, founder of Equinomics Research.
Market experts said the earnings gains in sectors that benefit from rupee depreciation would be less impressive than investors expect.
“Although currency depreciation helps some sectors, it will be temporary.Take the information technology industry, for example.
"They might see some rise in revenues because of the current conversion rates, but when the same order or project is renewed, the renewal rate is likely to come down in dollar terms.
"At the same time, those who purchase their raw materials in dollars tend to lose,” said Ambareesh Baliga, an independent equity analyst.
Baliga added that FPIs will be pushed to sell more than they intend to due to currency depreciation.
“They will sell today what they wanted to sell over a few days to ensure they do not lose more from rupee depreciation.
"The markets have felt the impact of rupee depreciation more acutely in the past few weeks.
"The rupee had been stable recently, so some recent falls were absorbed. But this is continuing,” said Baliga.
Oil and other sectors that import their raw materials are likely to be affected.
At the same time, pharmaceutical and specialty chemicals are likely to benefit from the fall in the rupee, said experts.
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