How to trade when rupee falls: Long IT, Short Nifty, Bank Nifty

Riken Mehta 

moneycontrol.com

Follow me on Twitter @mehtariken 

Major asset classes like equities, currencies, commodities and bonds have seen huge volatility in the last six months on speculation over the pace of the US Fed’s bond purchases. Fears of a reduction in monetary stimulus have been putting pressure on the rupee and equities. However, some traders have used these sharp moves to their advantage. One such strategy has been to go long on IT stocks and short the Nifty and Bank Nifty stocks.

In past six months, every time the rupee has depreciated more than three percent, Nifty has lost two percent while Bank Nifty has shed close to four percent in trade. Barring one instance, CNX IT has given positive returns.

Instances when rupee has fallen more than 3% in short duration (3-8 days) Period: 11-May-2013-12 Nov-2013. Rupee data source: Bloomberg

Days	Rupee	NIFTY	BANK NIFTY	CNX IT
June 5-11 (5 days)	-3.45%	-2.21%	-3.71%	0.54%
Jun 17-26 (8 days)	-5.58%	-3.79%	-7.18%	0.13%
Jul 29-Aug 2 (5 days)	-3.47%	-2.67%	-4.47%	2.54%
Aug 14-22 (6 days)	-5.60%	-5.11%	-7.18%	-2.49%
Aug 26-28 (3 days)	-8.63%	-3.40%	-7.50%	3.57%
Nov 5-12 (6 days)	-3.20%	-4.73%	-8.88%	1.03%

Weak rupee spells trouble for FCCB issuers; check them out

A falling rupee is bad news for companies that had raised capital through foreign currency convertible bonds, if the stock price is quoting at a steep discount to the conversion price. What this means is that the bond holders will ask for their money back, along with interest, instead of converting the loans into equities.

It is a double whammy for the FCCB issuing companies because the weak rupee means not only will the companies have to repay the loans, but there will be an added cost because of the weak rupee. There is a possibility that the rupee may stabilize by the time the bonds come up for redemption, and the impact may not be as bad as feared. However, in the short term, the company will have to make provide for the currency loss in their profit & loss statements.

Following are the companies that have raised capital between USD100-550 million through FCCBs over the last five years.

Source: Capitaline
* = Rs 58 per dollar conversion rate

Company	Source	Issue Size	Issue	Maturity Date	Conversion	Latest	Cash
	Date	(USD mn)	(Rs mn)*		Price (Rs)	Price (Rs)	[Latest]
Tata Steel	19/11/2009	546.9	31720.2	21/11/2014	605.53	290.55	3947
Sesa Goa	24/09/2009	500	29000	31/10/2014	346.88	145.85	24.88
Tata Motors	9/10/2009	375	21750	16/10/2014	623.88	291.75	1841
Tata Power	6/11/2009	300	17400	21/11/2014	1456.12	82.6	1087.4
Larsen & Toubro	9/10/2009	200	11600	22/10/2014	1908.2	1437.4	1778.1
Videocon Inds	3/12/2010	200	11600	16/12/2015	239.53	223.15	504.55
JP Power	27/01/2010	200	11600	13/02/2015	85.81	22.05	583.67
Suzlon Energy	4/4/2011	175	10150	6/4/2016	54.01	9.66	262.65
Welspun Corp	25/09/2009	150	8700	17/10/2014	300	46.3	640.94
JP Associates	28/08/2012	150	8700	18/09/2017	77.5	63.35	1022.2
REI Agro	23/10/2009	105	6090	13/11/2014	46.7	13.55	274.76

What led to massive fall in Indian rupee? Find out here

Riken Mehta 

The Indian rupee plunged to record lows on Monday, touching a level of 58.15 per dollar as the unwinding in currency carry trade is leading to the massive fall in the domestic currency.

Simply put, FIIs invested in Indian equities and debts earlier which were offering better returns compared to US 10 year bonds. However, the trade-off is becoming unviable for FIIs as the yield on these bonds have shot up significantly in the past one month on fears of Quantitative Easing (QE) or massive bond buying program coming to an end.

Back home, the Reserve Bank of India (RBI) is asking banks to cut interest rates that would lead to lower yields on deposits, reducing the arbitrage opportunities for foreign funds. If this situation continues for some more time, then one can expect massive unwinding in currency carry trades.

Last week, RBI has also pointed out that it will intervene in the forex market only to curb the volatility. Reading between the lines, the analysts believe that RBI will not try to suppress the rupee depreciation. In such a case, one cannot rule out the levels of 60/USD in the near future.

Will rupee slide speed up FII selling of Indian shares?

Santosh Nair, Riken Mehta
Moneycontrol.com

Finance minister P Chidambaram Thursday tried to pacify jittery markets, saying foreign capital flows were strong enough to bridge the current account deficit. But will the flows sustain going forward?

Theoretically, a weak rupee provokes foreign funds into selling Indian equities, as it would lower their portfolio value, if the stocks have not been performing.

Assume a foreign fund buys one share of a company for Rs 52 when the rupee was 52 to the dollar. If the stock price remains constant, and the rupee depreciates to 57 to the dollar, the value of the portfolio is now less than 1 dollar. But if the stock had risen to Rs 62, the foreign fund would not be worried, since the appreciation could more than cover up for the weakness in the rupee.

India is among the emerging market countries which have gained from the low interest rate policies of the US Federal Reserve and the European Central Bank. Generous dollops of liquidity resulting from those policies found their way into Indian shares, keeping share prices higher even during periods of weakness in the rupee.

But now market is not so sure if the liquidity flows will sustain, as there are doubts that the Fed may now start cutting back on its monetary stimulus.

Since the big sell off in global markets a couple of weeks back on these concerns, foreign fund flows into India have slowed.

And there is bad news on the debt front as well. FIIs have net sold close to Rs 4000 crore of Indian debt as bond yields are softening in anticipation of a decline in interest rates.

If capital flows slow down at this stage, this could trigger a vicious cycle of weakening rupee and foreign fund outflows. 

Jet, Kingfisher margins likely to crash on falling rupee

A falling rupee against the dollar has proved to be a double edged sword for ailing airlines struggling to fly in the black.

The aviation sector has already seen its operating cost go up significantly for the three months to September quarter as airline companies incur 30% expenses in dollar denomination. Secondly, the weak rupee could compress EBITDA margins to 3% from 12.3% Y-o-Y due to the weak rupee, say analysts

After falling to Rs 50 to a greenback few days back, the rupee is now at Rs 48.86 sending shockwaves to airline operators who are already reeling under losses for the past two quarters. While country’s largest private carrier Jet Airways had posted a net loss of Rs 123 crore for Q1, Kingfisher too posted a net loss of RS 263 crore on high fuel bills.

Jet Airways and Kingfisher Airlines officials with whom moneycontrol.com talked to have said that their Q2 topline has been dented as the rupee started to depreciate against the greenback by almost 12% when compared with the three months to June quarter.

"A sharp fall in the value of the rupee pushed up our external borrowing cost, lease rentals and salaries to expat staff. A falling rupee has bloated out operational cost by around 10% for the September quarter," says an official from a full service carrier.

Sample this:

Jet incurred Rs 361 crore towards employee salaries, Rs 207 crore on lease rentals and Rs 214 crore on interest payments on loans taken domestically and in dollar denominations when the rupee stood at Rs 45 against the greenback during Q1 of FY12. Now, with the rupee inching towards Rs 50 against the dollar, airlines will have a tough time maintaining costs, say analysts.

Also, while Jet has dollar denominated loans of around Rs 9,000 crore, its rival Kingfisher has a debt of around Rs 6,000 crore of which a significant amount is in dollar denomination. Fall in rupee will also increase the principal amount of loans for these companies.

Sharan Lilaney from Angel Broking explains, “Airlines are already making losses for the past two quarters and with lower purchasing value of the rupee, airlines are likely to report more losses this quarter.” He further adds that though Jet Airways and Kingfisher Airlines receive revenues from international operations in dollar terms, the impact will be offset by other larger expenses which they incur in dollar currency.

Though crude prices have slipped to $109.45  from $113 a barrel Q-o-Q, the weakening rupee has toned down the impact, say experts.

-Riken Mehta & Shaheen Mansuri