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Rupee Falling, Petrol Rising yet Stocks Soaring !

Author,

Aditya Goela

(Cleared all three levels of CFA)

Lately there’s a fiasco going on with the depreciating rupee and petrol prices making life time highs.

First, let’s talk about the depreciating rupee at Rs72/USD currently. People are going crazy on how badly the economy is doing or being governed and connecting it to politics.

Countries with higher inflation, their currencies will naturally depreciate because higher inflation, increases interest rates. As per my research the difference of inflation between US and India has been around 4.5% over a long period of time. That’s exactly why our rupee has been depreciating by around 4.5% annually (over a long period of time). Therefore as we go forward the INR will always depreciate against the USD as long as India has a higher inflation.

There is a good side too, as the rupee depreciates our exports become more competitive in the international market. This is healthy for our economy which is aspiring to grab a significant share in the global exports.

Now let’s talk about the petrol prices and crude oil. The price of crude oil in the international market has gone up from $26/barrel in 2016 to $71/barrel today.
The petrol prices have gone up because of the 3 reasons:

1.    Rise in crude oil prices

2.    Falling INR

3.    Subsidies on petrol removed

The govt has removed subsidy gradually on petrol since 2014, this means that petrol will now move with the change of oil prices in the international market as per market forces. So if we were to imagine crude oil prices to come down in future, the petrol rates would also go down.

  1998 2018 CAGR
INR/USD 39 72 3.11%
Petrol Prices (₹) 24 81 6.27%
Crude Oil ($) 15 71 8.08%
USA Inflation (%) 4.2 2.7 -
India Inflation (%) 10.2 6.5 -
USA Interest Rates (%) 5.3 2.0 -
India Interest Rates (%) 13.5 6.5 -
Nifty 50 817 11234 14.03%

In the above table based on actual figures, it is clearly visible that inspite of INR falling, oil price and petrol price rising over the last 20 years there has been good economic growth all over the world. During the same period Nifty 50 Index in India has given us CAGR % of 14.03 %. (CAGR % = Compounded Annual Growth Rate in percentage terms. In simpler terms Rs 100 invested for 20 years @ 14.03 % would become Rs1381)

So as investors, do we need to worry?  Yes, it may be a worry for people who have their savings parked in bank deposits.
The most important variable for us in investments is to focus on growth in earnings, rest of the negatives become insignificant then. These micro and macro negatives are the fodder of media which keep us absorbed and we end up taking wrong investment decisions based on emotions.

Therefore growth in earnings/GDP will always overshadow all negatives of the economy.
It would not be out of place to mention that in Q2/2019 USA GDP growth clocked the highest at 4.2% and the Indian GDP growth hit 8.2%, highest for the last many years.
If our economy is growing at healthy rates, all corrections, for different reasons, such as oil and rupee are opportunities for investors to invest more.

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