Asian shares are trading on a mixed note today. The Nikkei 225 is up 0.3% while the Hang Seng is down 0.9%. The Shanghai Composite is trading down by 0.6%.
Back home, India share markets opened the day marginally lower. The BSE Sensex is trading down by 84 points (down 0.2%) while the NSE Nifty is trading down by 33 points (down 0.3%). The BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index has opened the day up by 0.2%.
Sectoral indices have opened the day on a mixed note with oil & gas stocks, auto stocks and banking stockswitnessing maximum selling pressure.
The rupee is trading at 72.14 to the US dollar. The Indian rupee is witnessing selling pressure today as it opened its session to hit a fresh record low of 71.18 against the US dollar.
The rupee has been falling lately on the back of many factor such as rising current account deficit, rising global crude oil prices, and tepid export growth.
It has been falling against the US dollar since the start of this calendar year.
What does the fall in rupee mean for the Indian economy?
A depreciation in rupee means importers buying goods and services at a higher rate that earlier. This doesn't bode well for a developing economy that relies heavily on imports.
Also, India imports most of its oil requirements. So, a fall in rupee leads to a consequent rise in the import bill. The depreciation of the rupee will also add to crude oil's rising cost.
On the corporate side, companies who have taken foreign loans from abroad will be impacted. The repayment obligations in terms of principal and interest will rise, leading to a dent in the cash flows and financials.
Further, companies who import most of their raw material requirements will get impacted provided they have not hedged their foreign currency exposure.
Looking at the brighter side, rupee depreciation brings a cheer on the exports front.
A depreciating rupee will provide a much-needed cushion to falling exports. However, a falling rupee will not be the only factor to boost exports. There are certain structural issues too which the government needs to address.
Apart from the above issues, the falling rupee is also posing a big risk to the unhedged foreign currency borrowings. Meaning liability on these loans could up exorbitantly because of unfavourable forex movements.
Here's what we wrote about this topic in one of the editions of The 5 Minute WrapUp...
- Even as the PSU banks struggle to recognise and provide for their bad loans, the companies they lent to, have yet another problem. The rupee's sharp depreciation is posing a big risk to the unhedged foreign currency borrowings.
Lured by low interest rates overseas, Indian companies' foreign currency borrowing was at a 5-year high in FY18. Almost two thirds of it was unhedged. And the rupee's fall has turned their loan liabilities into a huge problem.
So, if the high exchange rate is here to stay, the possibility of PSU banks recovering some of their bad loans from the troubled companies is negligible.
In the news from global financial markets, after the deadline for public comments on US$ 200 billion China tariff expired on Friday, the US President Donald Trump said that his administration was ready to slap tariffs on almost all Chinese imports.
As per Reuters, Trump on Friday warned that he was ready to impose tariffs on almost all Chinese imports into the US. This will mean duties on another US$ 267 billion of goods on top of US$ 200 billion in imports primed for levies in coming days.
Note that last month, the Trump administration announced to impose 25% tariffs on imports of 279 items from China amounting to US$ 16 billion.
The US Trade Representative said that the move is a part of the US' response to China's unfair trade practices related to the forced transfer of American technology and intellectual property.
Both the countries have now slapped tariffs on US$ 50 billion of each other's goods in a tit-for-tat trade war, and Trump is considering imposing tariffs on another US$ 200 billion in Chinese imports.
How this trade war pans out remains to be seen. Meanwhile, we will keep you updated from all the developments from this space.
Stocks of oil marketing companies will be in focus today on the back of rising fuel prices. Note that lately, fuel prices have risen by up to Rs 5.3 per litre to record high levels.
The rise in prices has also raised criticism of the government not cutting excise duty on the heavily taxed petrol and diesel.
For a more detailed update on oil marketing companies, you can read our Energy sector report and check the latest Energy sector results.
The above rise in fuel prices is seen on the back of rising crude oil prices, which shot above US$ 80 per barrel lately. This is the highest level seen since November 2014.
In the past one year alone, oil prices have surged more than 50%.
Also note that rising crude oil prices not only affect fuel prices, but also has many other repercussions for the Indian economy.
They can be a big worry for the Modi government as well.
Have a look at the chart below. It shows India's total import bill of crude oil and petroleum products on an annual basis during the Manmohan Singh regime and the Narendra Modi regime.
Here's Why Crude Oil Was Modi's Best Friend So Far
It is clearly evident that the Modi government has been a big beneficiary of lower crude oil prices.
As Ankit Shah wrote in a recent edition of The 5 Minute WrapUp...
- During the UPA II regime, India's average annual oil import bill was US$ 133 billion. In fact, in the last three years of Manmohan Singh's leadership, the oil import bill exceeded US$ 150 billion. Compare that with an average annual oil bill of US$ 95 billion during the four years of Modi's leadership.
The actual savings would have been even higher, because I believe the consumption of crude oil and petroleum products would have been quite higher in the Modi era than the Manmohan era.
Last Thursday, Brent crude oil prices shot above US$ 80 a barrel.
This is the highest level since 2014. In the past one year alone, oil prices have surged more than 50%.
Now, what if oil prices go back to the levels during the Manmohan Singh regime? What would happen to India's current account and fiscal deficit? What would happen to inflation and RBI's stance on interest rates?
With the next general elections just a year away, rising crude oil prices are going to be a big worry for the Modi government.
It should worry you too...
Apart from that, what does rising crude oil prices mean for stock markets?
Richa Agarwal, editor of Hidden Treasure, tracks the oil and gas sector very closely. She believes the rise in crude oil prices is a bearish sign for stock markets globally. At the same time, any market correction, will throw up interesting buying opportunities in small-cap stocks.
This is what she wrote...
- After hitting a low of US$ 30 per barrel in January 2016, prices have more than doubled now.
The recent news of Saudi Arabia wanting crude oil prices to touch US$ 100 per barrel doesn't help. The 2008 recession was preceded by crude oil touching US$ 150 per barrel. Any movement upwards can result in a possible downturn for the global market.
While the Hidden Treasure team looks for long-term wealth creators, such macro situations can help to recommend such stocks at a bargain. The ones who keeps calm, when everyone else is losing their heads, will gain the most when the tide turns.
How the government handles this situation of rising crude oil and fuel prices remains to be seen. Meanwhile, we will keep you posted on all the developments from this space. Stay tuned.
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