Currency market is one of the most volatile market and the participation is huge. If you are not tracking the movement of currency you might not be in the category of informed investor. Important factors which are responsible for this dynamism of exchange rate include Government Policies, Interest Rate and demand and supply balance. Most of the factors are beyond the control of an individual investor and he has only a spectator’s role to play. One of the good points in this whole story is that if you are an informed investor you can sense the direction of movement of exchange rate well in advance by understanding the basics of currency fluctuation theories. As you can sense the direction why not to use this opportunity to extract some benefits from it? In this article we will try to figure out the impact of currency movements on some exchange rate sensitive sectors in Indian stock market based on which an individual investor can take some smart decisions for short term.

Impact of Exchange Rate Fluctuation

Broadly speaking we can divide the companies into two groups which are majorly impacted by currency movements:

Net Exporters – These are the companies who sells product to outside world and receive money in foreign currency terms (be it dollar, pound, euro etc). Whenever rupee is strong as compared to these currencies they are exposed to translation loss as they are able to buy fewer rupees with same amount of foreign currency. This translation loss hurts them as they have to bear the raw material cost is in terms of rupees. If the rupee gets weaker as compared to foreign currency the scenario reverses resulting in overall gain for the exporters.

Net Importers – These are the companies who buys product from outside world and pay in terms of foreign currency. Whenever rupee is strong they can buy more foreign currency with it for payment resulting in overall translation gain for them. In case of weaker rupees the situation reverses and there is a overall loss.

Choosing the sectors to invest

Now we know the broad impact of currency movement so let’s focus on the sectors where one should take exposure in case of anticipated currency movement (up or down)

Information technology (Infosys, TCS, Wipro)

This is one of the sectors which are most sensitive to exchange rates. It falls into category of net exporter hence benefits from rupee going weak. This is one of the recommended sectors to take exposure for short term as the stock price movements are in the tune of 4 to 5% in very short span of time.

Textiles (Arvind Mills)

This sector is a net exporter and receives most of the payment in dollar terms. It benefits once the rupee gets week.

Petrochemical (Reliance)

Earnings in most businesses are linked to dollar as the key input, crude oil is purchased in USD. Rupee appreciation benefits this sector in short and long term.

Pharma (Ranbaxy, Dr Reddy’s Labs)

This sector has exposure both in terms of export and import. They earn foreign currency through exports but they need it for imports too. This sector is a tricky one with respect to exchange rates.

Auto (Maruti, M&M)

This sector has considerable amount of income from export of vehicles. It benefits from rupee weakening but there is one more angle to it. Sometimes the parts they use for assembly are imported. The one who uses more indigenous parts benefits the most in case of rupee depreciation.

Summary of Buy/Sell decisions in Stock Market

Conclusion

There are a lot of other sectors which might get affected based on their foreign currency exposure. This article has covered some important sectors so that you take an informed decision. If you want to analyze a particular sector of your choice you need to concentrate on few basic points like if the company is a net exporter or net importer and how much hedging company does to protect against exchange rate fluctuations.