Sensex Slumps 470 Points; Rupee Continues to Slide

After opening the day in red, share markets in India witnessed negative trading activity throughout the day and ended the day in red. All sectoral indices traded in red, with stocks in the metal sector and stocks in the auto sector, leading the losses.

At the closing bell, the BSE Sensex stood lower by 467 points (down 1.2%) and the NSE Nifty closed down by 151 points (down 1.3%). The BSE Mid Cap index ended the day down 1.7%, while the BSE Small Cap index ended the day down 1.1%.

The rupee was trading at Rs 72.45 against the US$ in the afternoon session. Oil prices were trading at US$ 77.39 at the time of writing.

Asian stock markets finished in red. As of the most recent closing prices, the Hang Seng was down by 1.3% and the Shanghai Composite was down by 1.2%. The Nikkei 225 was up by 0.3%. Meanwhile, European markets were trading on a positive note. The FTSE 100 was up by 0.4%. The DAX, was up by 0.3% while the CAC 40 was up by 0.4%

In news about the economy. The Indian Rupee continued its slide against the US Dollar as it hit a new low of Rs 72.67 per US Dollar.

The rupee has been falling lately on the back of many factors 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.

The ongoing uncertainty in global markets especially in emerging nations has added to the weakness in the Rupee.

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.

Talking about currency wars and the falling rupee, we did a small exercise to understand the impact of the weak rupee on the markets.

India is a net importer. This means if the rupee is weak, the cost of imports increases and value of the export decreases - resulting in a widening current account deficit.

High Imports + Weak Rupee = Widening Current Account Deficit.

A high current account deficit also impacts the government's spending power.

Should You Be Worried About the Rising Dollar?

 

Also, companies which import raw material witness pressure on their margins and profitably.

So, this looks quite negative on the face of it. So, it's not surprising that markets get volatile when the currency depreciates.

Look at Indian rupee against the dollar from 1990. It has deprecated at a compounded annual rate of 5%.

Yes, the dollar has been on a winning streak from the beginning.

And despite that... the BSE Sensex has returned 14% compounded annually since 1990.

Thus, the falling rupee can bring volatility to the market in the short-term. But in the long-term, our market should be fine.

This is exactly what we keep in mind when picking stocks for Smart Money Secrets subscribers. We cut out the noise of short-term disruptions and look at the long-term picture beyond.

In news from stocks in the pharma sector. Sun Pharma share price was among the top losers today after the US Food and Drug Administration (USFDA) issued six observations in form 483 for its Halol unit in Gujarat.

While the company did not clarify on the observations, it was reported that the observations include aspects such as lack of appropriate test measures for lab controls along with some procedural issues too.

Further, the report quoted observations such as procedures designed to prevent objectionable microorganisms were not followed. It also said that written stability programme did not include sample size based on statistical data.

As per the US health regulator, Form 483 notifies the company's management of objectionable conditions at the facility inspected.

The company had earlier in June this year received establishment inspection report (EIR) from the US health regulator for Halol facility.

The USFDA had conducted a pre-approval inspection (PAI) of the company's Halol facility from August 27.

The company said it will be submitting its response on the observations to the USFDA within 15 business days, , adding that it is committed to addressing these observations promptly.

Sun Pharma share price ended the day down 3.7%.

Note that, Sun Pharma had hit a 52-week high of Rs 679 on the BSE last week. In past three months, it had outperformed the market by surging 36% as compared to a 9% rise in the benchmark index.