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India ETFs: Another Record Low for the Rupee


The already imperiled Indian rupee hit another record low of 59.98 against the U.S. dollar prompting another intervention by the Reserve Bank of India. That got the rupee back to 59.68 per dollar during Friday’s Asian session, but the currency is still headed for its worst weekly performance against the greenback in nearly two years.

The WisdomTree Indian Rupee Fund (ICN) is down 5.1% in the past five trading sessions, but there could be some near-term upside for the ETF as traders see the rupee gaining some ground to 59 per dollar. As a currency falters, imports cost more, creating widening current account deficits for countries that import large amounts of raw materials, such as India. India’s current account deficit woes have been heightened by the country’s insatiable appetite for gold. [Rupee's Plunge Could Affect Several ETFs]

While RBI has reportedly been selling dollars to bolster the rupee, the Indian currency, like the country’s equities, is seeing increased volatility. One-month implied volatility on rupee options, rose 169 basis points, or 1.69 percentage points, this week to 12.59%, reports Jeanette Rodrigues for Bloomberg.

The weak already prevented RBI from lowering interest rates at its meeting Monday and the faltering currency could have a negative impact on India’s already fragile hold on its investment-grade credit rating. Moody’s Investors Service confirmed as much Friday. Both Moody’s and Standard & Poor’s have the lowest possible investment-grade rating on Indian sovereign debt and the country has the lowest credit rating of any of the four BRIC nations. [India ETF Dichotomy]

The impact of the plunging rupee on Indian equities is already being seen. In the past five days, the WisdomTree India Earnings Fund (EPI) is down almost 9%. How the rupee’s drop will affect EPI’s holdings and those of other India ETFs in terms of profits remains to be seen, but there will certainly be winners and losers.

As large exporters, Indian pharmaceuticals firms stand to benefit from the weak currency. Operating margins for Indian technology exporters tend to rise 30 to 35 basis when the rupee falls 1% against the dollar, according to the Economic Times.

The benefit of the weak currency to those sectors depends on currency hedging losses, but the two groups combine for over 17% of EPI’s weight. However, Indian energy, industrial, telecom and utilities companies all have downside exposure to the rupee. For example, Indian telecoms hold large amounts of debt denominated in foreign currencies and utilities that have import fuel sources are unable to pass those higher costs along to customers, according to the Economic Times. Those sectors combine for 36.6% of EPI’s weight.

WisdomTree India Earnings Fund

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.