How rupee depreciation will impact your investments and budget
July, 01st 2013
He recent, sharp decline in the rupee will impact not just your planned vacation abroad or studies in a foreign country, but also your investments and budget. Find out how to counter its debilitating effect.
A - Monthly budget
THE IMPACT: Imported commodities like fuel or medicines, or products that depend on imported inputs for their manufacturing, will become expensive.
These can include FMCG products like soaps and detergents, which use crude oil as the base, as well as cars and electronic goods, which depend on components from abroad.
YOUR STRATEGY: Rationalise your spending by slashing discretionary spends like those on entertainment and travel, and it may help cushion the hike in prices of essential items.
B - Salary
THE IMPACT: The rupee's fall may also result in shrinking pay cheques for some, especially in industries that are dependent on imports since it results in an increase in production and operation costs.
To keep their margins intact, these companies could cut costs, one of which is human resources. Hence, doling out lower increments and a freeze on hiring may be an option.
YOUR STRATEGY: IF your skill sets are aligned only to the sector you are in, a job switch may lead to an above-average hike.
C - Investments
- It may result in an FII exodus, both from equity and debt markets.
- It could raise inflation and the RBI may not cut rates.
- A depreciation of Rs 1 against the USD increases oil underrecoveries by Rs 9,000 crore. It's a negative for oil marketing companies(OMCs) and worsens the fiscal deficit.
- While the exporters benefit, importers suffer.
- The companies with foreign debt may find it difficult to service it.
- Stay with defensive sectors like IT, pharma and FMCG for now.
- Since the RBI is not expected to cut rates soon, avoid high-beta, rate-sensitive sectors like real estate and infrastructure for now.
- Since the rupee depreciation will compound asset quality issues, it is better to concentrate on private-sector banks or some PSU banks with high asset quality.
- The government may not allow OMCs to pass on the additional import costs before elections, so avoid these till there is clarity.
- The companies with high foreign debt are in a precarious situation, so steer clear of these for the time being.
- To reduce gold consumption, the government is trying to create bottlenecks for jewellers and gold loan companies. So, this is another segment worth avoiding now.
- There is bound to be a delay the expected interest rate cuts by the RBI.
- The FII outflow from the debt market due to depreciation fears can raise yields; the 10-year yield has gone up in the past few days.
- Do not resort to a knee-jerk strategy shift.
- Since the interest rates are expected to come down in the medium to long term, continue to hold on to long-term debt papers and debt/gilt funds.