Falling Rupee: Boon Or Bane For Export-Oriented Stocks?
Investors believe that weakening INR is good for exports and hence it is equally good for exports oriented stocks. DSIJ Research Team finds out the relationship is not that linear between weakening INR and performance of export oriented stocks
The Indian rupee fell to its all-time low last month against US dollar, breaching the 69 per USD level for the very first time in its history. The rise in crude oil prices and the ballooning fiscal deficit took a toll on the rupee, which lost more value than most emerging-market currencies this year. In fact, the rupee has emerged as the worst performing currency in Asia in 2018 till date.
A depreciated currency functions as a direct subsidy for exporters, whereas it acts as an unpleasant tax for importers. China, given its strong exports, has been using the undervaluation of currency as a trade tool for decades. Hence, a general belief among investors is that a falling rupee, coupled with a strengthening of the US economy, will provide some cushion to companies that export products and services overseas, thus earning more foreign currency. Although, this argument is attractive, the perception is far from reality in the Indian context.
Before we dig deeper to find whether or not depreciation in rupee actually helps export-oriented stocks, it will be only appropriate to first understand the impact of the ongoing trade war on our currency and our exports.
Even if we consider a scenario with no trade war, the US has been following policies that has increased the flow of dollar back into the US, thus putting pressure on the Indian rupee.
Impact of trade war on rupee and Indian exports
The US government has imposed 25 per cent levy on more than 800 Chinese products, which include electronic goods, industrial machinery, medical devices, auto parts, etc. In retaliation, China has slapped tariffs on about 545 US items, which include agricultural products, aquatic products and vehicles. Since India is not a major exporter of the products that have come under the US scanner in its trade battle with China, there is little chance for India to substitute Chinese exports to the US, at least for now.
Thus, in the emerging situation, we can expect the flight of capital from emerging markets to the US to intensify. This could result in depreciation of most currencies.
So, does falling rupee really help exports?
India is not an isolated market and its exports are tightly linked to imports. Owing to its strategic location, India shipped close to US $295.8 billion worth of goods around the globe in 2017. In dollar amount, that represents a drop of 12.1 per cent since 2013, but an increase of 13.6 per cent from 2016 to 2017. India mostly exports pearls, precious and semi-precious stones and jewellery (about 16 per cent of total shipments); mineral fuels, oils and waxes and bituminous substances (about 12 per cent); vehicles, parts and accessories (about 5 per cent); pharmaceutical products (about 5 per cent); and organic chemicals (about 4 per cent).
On the import front, India imported close to US $444.1 billion worth of goods from around the globe in 2017, down by 4.7 per cent since 2013, but up by 24.5 per cent from 2016. India's main imports comprise of mineral fuels, oils and waxes and bituminous substances (about 27 per cent of total imports); pearls, precious and semi-precious stones and jewellery (about 14 per cent); electrical machinery and equipment (around 10 per cent).
As it can be inferred, the inputs for two of our leading export segments, i.e. petroleum and derived products, and gems and jewellery have their origin abroad. Crude, rough diamonds and gold are imported to make these export products. Also, a considerable part of our non-jewellery, non-petroleum based manufacturing exports also are closely linked to the global value chains since we need to import several engineering and electronic components, steel products, automobile parts, etc. which are then processed and assembled before being exported. Further, higher global prices will make input and raw material costs to soar for the domestic manufacturers and make them less competitive in the international market. Only for sectors such as agriculture, textiles, leather and transport equipments it can be said that these sectors export a lot more than they import and, therefore, these will be benefited by the weakening rupee.
Where does India export and import from?
As per data from Directorate General of Commercial Intelligence and Statistics, Kolkata, India's exports were highest to the US for the two-month period of April and May this year at Rs.58,221.46 crore, followed by the UAE at Rs.40,814.21 crore. China came third at Rs.17,614.44 crore.
In case of imports, it was just the opposite with China at the top of the list with Rs.73,348 crore and the US in the second spot at Rs.36,002.46 crore.
Further, India's trade deficit with China has risen to $51 billion in FY18 from $16 billion in FY08. In contrast, we have a trade surplus of $23 billion with the US.
Dhruv Desai
Director & COO, Tradebulls Securities
What is your outlook on the export-oriented stocks in India?
The outlook for export-oriented stocks is neutral at the moment as the ongoing trade war is giving rise to a tit-fortat situation. The companies catering to western economies may take some hit, while companies catering to the Asian economies will find themselves in a positive position.
Which sectors, in your view, are likely to benefit the most from the weakening rupee?
Generally, the export-oriented sectors are the beneficiaries of a weakening rupee. However, the advantage is getting restricted on account of trade tariffs. Still, sectors which are excluded currently from the US import tariffs such as textiles, IT and pharma will get the benefit of a weak rupee. Domestically, the hotel industry is expected to reap the rewards from a weak rupee as there will be increase in inbound tourists.
What is your outlook on export-oriented sectors in India?
India runs a trade surplus against the US and the EU, but deficit against the Asian economies, especially China. The sectors where the US has implemented tariffs like steel and aluminium will have a negative impact and we are bearish on them. China is planning to reduce tariffs on more than 8,500 goods from India like chemicals, metals and farm products. So we are bullish on export-oriented sectors like chemicals, which will get dual benefits from reduced tariffs and lower regional production in China on account of pollution curbs. We are also neutral to positive on the agriculture sector, which exports to the EU and other Asian economies.
What are the various headwinds for export oriented stocks, apart from the ongoing trade war?
The ongoing trade war may trigger potential damage to the US and other global economies and would raise prices and up-end global supply chains. The higher prices may taper demand and may halt the global economic expansion. This will create headwinds to all export-oriented stocks. In spite of China planning to reduce tariffs on goods from India, the complicated regulatory clearance is still the biggest headwind for export-oriented companies. It needs to be simplified to make inroads into other Asian economies. For pharma stocks, regulatory issues like FDA are major headwinds.
Ritesh Ashar
Chief Strategy Officer,
KIFS-Trade Capita
"Since January, rupee has witnessed a fall of 7 per cent against the US dollar and it may still see a further fall and touch the `70 per dollar-mark in the coming future. In such a scenario, where the rupee is weakening and is expected to go down further, the export oriented-sectors may benefit. Sectors like information technology and pharmaceutical companies which have large exposure to the US will be benefitted the most."
It should be remembered that exchange rate of a currency is not really an indicator of the economic strength of a country. The economic position of India in 2018 is superior to that of 1947, even then the rupee has fallen in value.
Conclusion
Any depreciation of rupee works both ways, with gains limited to the extent of value addition happening in India. Many sectors of our economy find their profits eroded due to the erosion in the value of the rupee because these sectors import more than they exports. The more the value of raw materials imported, the slender the margin from exported products. In short, one cannot rely on a weak rupee alone to boost exports. It would be appropriate to discount the expectation of a weak rupee boosting exports.