USD-INR Impact on IT, Pharma, Aviation & Trade

Hello, I am CS Sandeep Kumar, and today’s topic is Currency Movement and Sector Impact. In this video, we will learn how currency movements impact exporters, importers, IT, pharma, crude-linked sectors, foreign flows and company earnings. We will also understand what investors should track in quarterly results when analysing the impact of currency movements. 

So, let’s begin. 

Some companies benefit when the rupee weakens, while others face pressure on profitability. The question is: why does this happen? Currency movement does not just affect exchange rates. It can directly impact revenue, costs, margins, earnings and, in some cases, even the balance sheet. 

Throughout this chapter, we will follow a simple chain: movement in USD/INR can affect revenue and costs, which can influence margins and earnings and, ultimately, stock prices. 

Why Does the Rupee Move? 

The simplest answer is dollar demand and supply. When demand for the US dollar increases, the rupee can come under pressure. When dollar demand falls, the rupee may strengthen. 

Several factors drive dollar demand. One of the most important is crude oil imports. India imports a large proportion of its crude oil requirements, and these imports are paid for in US dollars. Therefore, higher oil imports or higher crude oil prices can increase dollar demand and put pressure on the rupee. 

Foreign capital flows are another important driver. When Foreign Institutional Investors, or FIIs, invest in India, they generally sell dollars and buy rupees, which can support the rupee. However, when foreign investors withdraw money from India, demand for dollars can increase and the rupee may weaken. 

The trade deficit also matters. When a country imports more than it exports, the economy requires additional foreign currency to pay for those imports. This can create additional pressure on the rupee. 

Global factors also influence currency movements. For example, when US interest rates rise, global capital can move towards US assets. This can strengthen the US dollar and put pressure on emerging-market currencies, including the Indian rupee. 

So, currency movements usually reflect a combination of crude oil prices, the trade deficit, foreign capital flows and US interest rates. 

Exporters versus Importers 

One of the simplest ways to understand currency impact is to divide companies into two broad categories: exporters and importers. 

Exporters earn revenue from foreign markets, and a significant portion of their earnings may be received in US dollars. Examples include IT companies, pharmaceutical exporters and chemical exporters. 

Importers, on the other hand, have costs or purchases that are linked to the US dollar. Examples can include airlines, oil companies and electronics companies. 

Generally, a weaker rupee can benefit exporters because their dollar revenue translates into more rupees. Importers, however, may face higher costs because they need more rupees to purchase the same amount of goods or services priced in dollars. 

Consider an exporter earning the same amount of revenue in US dollars. If the USD/INR exchange rate rises from 80 to 85, the same dollar revenue will translate into a higher amount in rupees. 

The underlying business may not have changed at all but reported rupee revenue can still increase. 

This is why every increase in reported revenue does not necessarily represent business growth. Sometimes, part of the growth comes from favourable currency movement rather than improvement in the underlying business. 

Impact on the IT Sector 

The Indian IT sector is generally considered a beneficiary of rupee depreciation.  The reason is simple: a large portion of revenue is earned in foreign currencies, particularly US dollars, while a significant part of costs remains in Indian rupees. For example, employee salaries, office expenses and administrative costs are largely incurred in rupees.  When the rupee weakens, the same dollar revenue converts into more rupees, which can support margins and profitability. However, there is another important concept investors should understand: constant currency growth.  IT companies often report two growth numbers: reported growth and constant currency growth. Suppose the underlying business grows by 5%, while favourable currency movement adds another 4% to reported growth. Reported growth may appear to be 9%, but the actual business growth remains 5%. 

This is why experienced investors closely track constant currency growth. It helps show the underlying business performance after removing the impact of currency movements. 

Impact on the Pharma Sector 

At first glance, the currency profile of pharmaceutical and IT companies may appear similar. Both sectors earn a significant portion of their revenue from export markets, especially the US. This means that a large share of their revenue may be received in dollars, while many costs remain in rupees. 

Therefore, a weaker rupee can also provide support to pharmaceutical companies. However, there is an important difference. In IT, currency movements can be a meaningful earnings driver. In pharma, earnings also depend heavily on factors such as USFDA approvals, product launches, generic drug pricing and regulatory developments. 

If a company faces regulatory issues or an important product launch is delayed, the benefit from favourable currency movement may be limited. 

This is why investors analysing pharmaceutical companies should track currency movements alongside the product pipeline and regulatory developments. 

Crude Importers and Crude-Linked Industries 

Now, let us look at sectors that can face pressure when the rupee weakens. Crude oil plays an important role here. If crude oil prices are rising while the rupee is also weakening, companies can face a double impact. 

The commodity itself becomes more expensive, and at the same time, more rupees are required to pay for each dollar of imports. 

This impact is not limited to oil companies. It can also affect paint companies, tyre manufacturers, plastic manufacturers, chemical companies and packaging companies because a significant portion of their raw material basket may be linked to crude oil. 

Impact on the Aviation Sector 

Aviation is one of the most currency-sensitive sectors in the market. Airlines earn a large portion of their revenue in rupees, but several important costs are linked to foreign currencies. 

These can include Aviation Turbine Fuel, aircraft lease payments, spare parts and maintenance contracts. Therefore, when the rupee weakens, operating costs can increase and margins may come under pressure. 

Impact on the Chemical Sector 

The impact of currency movements on chemical companies can be more complex. Some companies are exporters, some depend heavily on imported raw materials, and some have exposure to both. 

Therefore, rupee depreciation is not necessarily positive for every chemical company. 

For example, a company may earn a significant portion of its revenue from exports, but if it also imports a large part of its raw materials, some of the currency benefit on revenue can be offset by higher import costs. 

When analysing chemical companies, investors should therefore look at two important numbers: the percentage of revenue earned from exports and the percentage of raw materials that are imported. 

Forex Gains and Forex Losses 

Sometimes, an improvement or decline in reported earnings may not be caused by the underlying business performance. It may simply be the result of currency movements. 

Suppose a company exports goods to a US customer but receives payment after 90 days. If the rupee weakens during this period, the company may report a forex gain. If the rupee strengthens, the company may report a forex loss. 

The underlying order and business transaction remain exactly the same, but reported profit can change because of the currency movement. This concept is not limited to exporters. If a company has dollar-denominated loans and the rupee depreciates, the rupee value of that liability can increase, potentially leading to forex losses. 

This is why experienced investors distinguish between operational earnings and forex gains or losses. If you see a sudden jump or sharp decline in earnings, do not look only at Profit After Tax. Also understand whether the change came from actual business performance or currency movements. 

Hedging 

The next question is: how do companies manage currency risk? 

The answer is hedging. 

Large companies generally do not leave their earnings entirely exposed to currency movements. Their objective is not to make money from exchange-rate movements, but to make earnings more predictable. 

Hedging means managing future currency risk in advance. Companies may use instruments such as forward contracts, currency swaps and options. An important point to understand is that the purpose of hedging is not to maximise profits. It is to reduce risk. 

There is also a trade-off. If the rupee weakens unexpectedly, a heavily hedged company may not receive the full benefit of the currency movement. But if the rupee strengthens, the same hedging strategy can help protect earnings. 

This is why two companies operating in the same industry can report very different forex gains or losses. 

A company reporting a higher forex gain is not necessarily performing better. Sometimes, the difference simply comes from its risk-management and hedging policy. 

Currency and FII Flows 

Currency movements are also connected to market liquidity and foreign capital flows. When foreign investors invest in India, they generally sell dollars and buy rupees. FII inflows can therefore support the rupee as well as market liquidity. 

When foreign investors withdraw money, FII outflows can put pressure on the rupee, reduce liquidity and increase market volatility. This is why market weakness and rupee weakness can sometimes occur together. 

When tracking FII data, investors should also monitor USD/INR movements because currency trends can provide useful context on foreign capital flows. 

What Should Investors Track in Quarterly Results? 

Whenever you analyse quarterly results, it is useful to follow a currency checklist. On the revenue side, check the percentage of revenue that comes from exports and understand the company’s geographical revenue mix. 

Look at how much revenue comes from the US and other international markets. 

Also compare reported growth with constant currency growth. This can help identify whether growth is being driven by the underlying business or by favourable currency movements. On the cost side, check the percentage of raw materials that are imported and whether the company’s costs are linked to the US dollar or other foreign currencies. 

This helps you understand how currency movements could affect company margins. Next, review currency disclosures. Check the forex gain or loss, the impact of hedging, and what management is saying about the currency outlook. 

Management commentary and the notes to financial statements can often provide valuable information. Finally, analyse margins. If margins have improved, ask an important question: is the improvement coming from stronger business performance or favourable currency movements? 

Long-term wealth is created by business quality, not by short-term currency fluctuations. 

Conclusion 

In this video, we learnt how currency movements can impact company earnings, margins and stock prices. We understood their impact on exporters, importers, IT, pharma, aviation, crude-linked sectors, forex gains and losses, hedging and FII flows. 

Most importantly, investors should always understand whether a company earns dollars or spends dollars. In the next video, we will discuss Bond Yields and Equity Valuations. We will decode all of this in the next chapter. 

See you in the next video. 

Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing.