![Exchange rate fluctuations are normal and should not cause investors excessive concern. (Representative image) Exchange rate fluctuations are normal and should not cause investors excessive concern. (Representative image)](https://images.news18.com/ibnlive/uploads/2021/07/1627283897_news18_logo-1200x800.jpg?impolicy=website&width=510&height=383)
Exchange rate fluctuations are normal and should not cause investors excessive concern. (Representative image)
The exchange rate between the Indian rupee and the US dollar plays a vital role in these dynamics, determining the financial outcomes for both businesses and investors.
Currency fluctuations are a key factor in the import and export business. An economy with a surplus of goods can export them to other countries, while an economy that needs certain products must import them. However, the biggest challenge in this trade cycle is navigating currency fluctuations. These fluctuations have a direct impact on the earnings and profitability of companies engaged in international trade, which in turn affects their stock prices and, consequently, their investment portfolios.
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The exchange rate between the Indian rupee and the US dollar plays a vital role in these dynamics, determining the financial outcomes for both businesses and investors.
Impact of Rupee Rising on Indian Corporate Stocks
- Information Technology: Indian IT companies generate a significant portion of their revenue from software service exports, so a rise in the value of the rupee has a negative impact on their profitability and share prices.
- Pharmaceutical products: Indian pharmaceutical companies depend heavily on exporting their products to markets like the US and Europe. A rise in the value of the rupee would reduce their profitability, leading to a fall in their share prices.
- Automotive and Engineering: Companies in the automotive and engineering sectors also export a significant portion of their output. A rise in the rupee will have a negative impact on stocks in these sectors.
- Oil and Gas: Cheaper imports benefit oil and gas companies by lowering input costs, increasing profit margins and boosting stock prices.
- FMCG: For fast-moving consumer goods companies, a stronger rupee makes imported raw materials cheaper, lowering costs and improving profit margins, which in turn boosts their stock prices.
Impact of Rupee Decline on Indian Company Shares
- meInformation Technology: Since revenues are denominated in dollars, a depreciation in the rupee increases the profitability of IT companies, which has a positive impact on their stock prices.
- Constraints: Increased competitiveness of Indian drugs in overseas markets, leading to improved exports and profitability.
- Automotive and Engineering: A depreciating rupee makes exports more profitable, which boosts long-term profitability and boosts stock prices.
- Oil and Gas: The depreciation of the rupee has increased the cost of importing crude oil and natural gas, reducing profits and pushing down stock prices.
- FMCG: As the prices of imported raw materials rise, the costs of FMCG companies increase and profit margins decrease, which in turn causes share prices to fall.
Managing currency volatility in your portfolio
To build long-term wealth, investors should create a diversified portfolio. Balancing exporters and importers helps manage currency risk.
When selecting stocks, focus on companies with solid business models, global operations, and currency hedges across countries.
Equity-oriented funds provide a diversified portfolio that mitigates currency risk. Adding international mutual funds provides geographical diversification beyond Indian currency risk. Exchange-traded funds (ETFs) also provide exposure to indices that are less affected by currency fluctuations.
Should investors be concerned about exchange rate fluctuations?
Currency fluctuations are normal and should not cause investors to worry too much. Proper research and investment in large-cap stocks with valuable products and growth opportunities can mitigate the effects of short-term currency volatility. Creating a diversified portfolio and holding investments for the long term can help hedge risks.
conclusion
Currency fluctuations are common and can affect an investor's portfolio. However, diversification helps minimize risk. The appreciation of the rupee has a negative impact on export-oriented sectors, while import-dependent sectors benefit from lower input costs.
– The author is the CEO of Bigul. The views expressed are personal.
disclaimer: The opinions and investment tips of the experts in this News18.com report are theirs alone and do not represent the views of the website or its management. Readers are advised to consult with a qualified professional before making any investment decisions.