A PESB Newsletter with the most relevant and decluttered financial news!

20/04/2024

The Rupee is almost at its ‘weakest’

The Indian Rupee has almost hit an all-time low against the dollar with an exchange rate of USD 1 = INR 83.530 as of 19 April 2024. The last time the rupee plunged this much was during 23 March 2024 when USD 1 = INR 83.607, around the US Fed meeting that happened on 20 March 2023 during which the fed delayed rate cuts. This week as well on 17 April 2024, US Fed signaled yet another delay in interest rate cuts amidst high inflation (based on the inflation numbers we saw last week).

Which factors affect the rupee, and by how much?

FED Rates

We covered how US bonds matters to us in our previous Market Beats. To oversimplify, the more attractive US bonds become the less attractive every other instrument gets. This phenomenon affects the rupee dollar exchange rate as well. The reason for this is simple and intuitive: dollar-denominated investments become more attractive, thus increasing the demand for dollars.

Figure 1:  US bonds rates and USD INR exchange rates

Figure 1 eludes to the how currency reacts when US bonds prices change. Visually, the relationship seems close.

Trade Balance

An increase in the trade deficit (the difference between imports and exports), leads to currency depreciation. However, that is not the case with the rupee right now. India’s trade deficit has been reducing due to robust exports of electronic goods, drugs and pharmaceuticals, engineering goods, iron ore, cotton yarn/ fabric, handloom products, and ceramic products & glassware.  Therefore, while India has always been a net importer, the current trade deficit isn’t driving the dip in the rupee. However, this contributes to the steady decline in its value

Figure 2:  Indian Trade Deficit

Reserves and Global Tensions

The RBI has to maintain high reserves to settle transactions, as we are net importers; high reserves also give the RBI the ability to shield the economy from unpredictable global financial markets and geopolitical tensions. As of April 5, 2024, the forex rose by $2.98 billion amounting to a solid $648.562 billion, marking the seventh consecutive week of increase in foreign reserves making India the 3rd largest reserve of dollars in the world. This continued  rise in reserves serves as a financial bulwark amid global uncertainties and supports the RBI's efforts in stabilizing the rupee.

We all know that India’s oil import bills are significant. The tensions in the middle east – though not at critical levels as there are calls for calm in Israel and Iran– could result in increased oil prices leading to severe increase in India’s import bills. Our foreign reserves will provide a cushion against this adverse hypothetical scenario. Therefore, though the rupee is falling, it is not a cause of worry as its fundamentals such as relative inflation level, trade balance, foreign reserves are strong.

Who cares?

Exporters and importers.

Exporters across various sectors, including manufacturing, commodities, and services such as IT and global back offices, benefit from a weaker rupee as their earnings in foreign currency translate into more rupees. This can potentially enhances their revenues in local currency terms and can improve profit margins. Even local manufacturers who produce goods that can substitute imports can benefit as their products become cheaper relative to foreign products, thus potentially increasing their market share within India.

Importers face significant challenges, as they need to spend more rupees to buy the same amount of goods or services from abroad, squeezing their margins, especially if they are unable to pass these increased costs onto consumers. Moreover, the general populace bears the brunt of inflationary pressures caused by higher costs of imported goods, particularly essential items like oil.

Vodafone Idea FPO: Can this FPO Turnaround Vodafone Idea? Let’s understand…

Vi’s proposed issue size is ₹ 18,000 Crores. Out of which ₹12,750 Crores will be used to purchase equipment for expanding their network infrastructure, which involves setting up new 4G sites, enhancing the capacity of existing 4G sites, and establishing new 5G sites. ₹2,175 Crores will be used for payment of outstanding deferred payments for spectrum to the Department of Telecommunications (DoT).

Vodafone Idea will be experiencing an insane cash flow situation starting next year:

Company had opted for a four year moratorium towards deferment of spectrum payment obligations. This moratorium is expiring between October 2025 to September 2026. Following the expiration, company will have a cash flow obligation of ₹ 29,074 Crore for the FY26 and ₹ 43,019 Crore per year for the period from FY27-FY31.

The government could convert some of its obligations into equity, but with only a 33% stake, there isn't much flexibility. Given VI's negative net worth and the majority of obligations owed to the government, it may eventually run out of funds.

Quarterly results preview:

Reliance Industries

Reliance Industries Ltd is likely to report robust quarterly earnings, driven by recovery in its core oil-to-chemicals business, sustained momentum in telecom and retail, and improved refining margins. The rebound in the petrochemicals cycle and rising crude prices further boost earnings. Reliance Jio continues to see robust subscriber additions driven by the Jio Bharat phone, with stable ARPU growth expected. Investors will focus on the utilization of the ₹75,000 crore worth of announcements in the new energy business, debt profile, Retail store additions, and telecom pricing actions.

Figure 3: Reliance Industries Earnings snapsot

Macro News Updates

Company specific News Updates 

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