When the Dust Settles on
the INR
Quick Comment – Impact on our views: The sharp
INR move has multiple implications for India. In
summary, earnings move higher net of the USD
positions and macro impact.
From a macro perspective, the inflation rate potentially
rises, yields go higher, and growth becomes more
uncertain. The RBI estimates that a 10% INR fall could
add approximately 60bps to WPI in the short run (in the
same quarter) and up to 120bps in long run. However,
the rupee move will also hasten the adjustment on the
external deficit. The rupee is arguably at fair value
(Exhibit 1) and, combined with the government’s effort
on fiscal consolidation, it will bring down the current
deficit in the next few months. A declining twin deficit is
good for equities. The sharp rupee depreciation could
also hasten reforms. Indeed, one of the reasons for the
shift in the government’s actions in September last year
was the prospects of a sharp rupee depreciation (if the
credit rating was downgraded) and its impact on inflation
in an election year. The downside risk is that the rupee
move tests the RBI’s patience and forces it to lift rates.
From an earnings perspective, corporate India runs a
net long USD position of around US$20 (simplistically
speaking, the current account net of oil, gold and
remittances – Exhibit 2) and earnings rise 1.5% for every
5% move on the currency. The negative macro impact of
the INR move will moderate the earnings gains. The
biggest potential beneficiaries and losers are outlined in
Exhibit 5. However, this could be different from the way
the equities react – Staples outperforms in all episodes
of rupee depreciation (Exhibit 4).
Corporate balance sheets, however, take a hit. This hit
is concentrated among a smaller group of companies.
We estimate forex liabilities at around US$200 billion. A
5% move increases liabilities by US$10 billion. From our
coverage universe, the worst-affected include Bharti,
RCom, Tata Power, Ranbaxy, United Spirits, United
Phosphorous, GESCO, Reliance Industries and
Bhushan Steel (not in that order).
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the INR
Quick Comment – Impact on our views: The sharp
INR move has multiple implications for India. In
summary, earnings move higher net of the USD
positions and macro impact.
From a macro perspective, the inflation rate potentially
rises, yields go higher, and growth becomes more
uncertain. The RBI estimates that a 10% INR fall could
add approximately 60bps to WPI in the short run (in the
same quarter) and up to 120bps in long run. However,
the rupee move will also hasten the adjustment on the
external deficit. The rupee is arguably at fair value
(Exhibit 1) and, combined with the government’s effort
on fiscal consolidation, it will bring down the current
deficit in the next few months. A declining twin deficit is
good for equities. The sharp rupee depreciation could
also hasten reforms. Indeed, one of the reasons for the
shift in the government’s actions in September last year
was the prospects of a sharp rupee depreciation (if the
credit rating was downgraded) and its impact on inflation
in an election year. The downside risk is that the rupee
move tests the RBI’s patience and forces it to lift rates.
From an earnings perspective, corporate India runs a
net long USD position of around US$20 (simplistically
speaking, the current account net of oil, gold and
remittances – Exhibit 2) and earnings rise 1.5% for every
5% move on the currency. The negative macro impact of
the INR move will moderate the earnings gains. The
biggest potential beneficiaries and losers are outlined in
Exhibit 5. However, this could be different from the way
the equities react – Staples outperforms in all episodes
of rupee depreciation (Exhibit 4).
Corporate balance sheets, however, take a hit. This hit
is concentrated among a smaller group of companies.
We estimate forex liabilities at around US$200 billion. A
5% move increases liabilities by US$10 billion. From our
coverage universe, the worst-affected include Bharti,
RCom, Tata Power, Ranbaxy, United Spirits, United
Phosphorous, GESCO, Reliance Industries and
Bhushan Steel (not in that order).
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