Weak Rupee Should Encourage Global Diversification, Not Panic Selling: Prashasta ...
As the Indian market grapples with a weakening rupee, elevated crude oil prices, foreign capital outflows and persistent geopolitical uncertainty stemming from the West Asia conflict, investors are reassessing portfolio strategies amid shifting global and domestic dynamics. The concerns are mounting that inflationary pressures could weigh on corporate earnings in the coming quarters.At the same time, sectors such as defence, pharmaceuticals, power and energy have emerged as market favourites, while private banking stocks have corrected despite retaining strong fundamentals. In an interview with BW Businessworld, Prashasta Seth, CEO of Prudent Investment Managers LLP, discusses how investors should interpret the rupee’s weakness, whether global investing deserves a larger allocation in Indian portfolios, and which sectors are best positioned to navigate a high crude oil environment.
Edited excerpts:
The rupee has fallen by over 6 per cent this year. How should investors interpret this move from an investment perspective?
In the current cycle, the rupee’s weakness has been influenced by a strong US dollar environment, elevated crude oil prices, and persistent FII outflows from emerging markets. Historically, the rupee has depreciated at an average rate of 3–4 per cent annually against the US dollar over the past two decades. However, Indian equities have still generated robust long-term returns despite this trend.
Export-oriented sectors such as IT services, pharmaceuticals, speciality chemicals, and select auto ancillary and textile companies typically see margin expansion due to dollar-denominated revenues. India’s top IT companies derive over 70–80 per cent of their revenues from overseas markets, making them natural beneficiaries of rupee weakness. Although the advent of AI has led to a significant downturn in the IT sector, a weak currency has come to the rescue of the IT sector in general.
At the same time, sectors dependent on imported raw materials, such as aviation, oil marketing companies, and certain consumer businesses, may experience cost pressures. Therefore, currency depreciation should encourage portfolio diversification rather than trigger panic selling.
From an investment perspective, it’s important to evaluate whether this trend will reverse and position the portfolio accordingly. We believe that this trend will reverse as things normalise in West Asia.
Which sectors are most vulnerable to margin pressure if crude oil prices remain elevated in Q1?
India imports nearly 85 per cent of its crude oil requirement, making the economy sensitive to sustained oil price increases. Every USD 10 increase in crude prices can widen India’s current account deficit (CAD) by approximately 0.3–0.4 per cent of GDP and create inflationary pressure across sectors. So if crude oil prices remain elevated in Q1, aviation, paints, chemicals, logistics, tyres, and OMCs will continue to see margin pressures. Aviation companies are particularly exposed because aviation turbine fuel (ATF) accounts for nearly 35–40 per cent of operating costs.
Similarly, paint companies use crude-linked derivatives as key raw materials, which directly impact EBITDA margins.OMCs also face pressure if retail fuel prices are not fully passed on to consumers due to political or inflation concerns. Consumer discretionary businesses could indirectly face margin pressure through rising transportation and packaging costs.
On the other hand, if the crude oil prices cool off due to peace in West Asia, the same sectors will hugely benefit as the principal RM costs go down.
Does a weaker rupee strengthen the case for global investing among Indian investors?
Indian investors have traditionally been under-allocated to global assets despite India accounting for only around 3–4 per cent of global market capitalisation. Concentrating an entire portfolio in one geography increases concentration risk. Global investing offers exposure to sectors and companies that are not adequately represented in India, such as advanced AI, semiconductors, cloud infrastructure, and global consumer technology. Additionally, dollar-denominated assets help hedge currency depreciation risk.
We believe some allocation to global assets is prudent for long-term investors, depending on their risk appetite and financial goals. However, given that a substantial rupee depreciation has happened too quickly, it may make more sense to have a bias towards domestic investment
Private banking stocks have corrected despite strong fundamentals. Is this becoming a compelling buying opportunity?
The correction in private banking stocks or banking in general can primarily be attributed to deteriorating macro, as mentioned, due to rising crude and depreciating currency. Higher inflation and government borrowings, coupled with rising yields, have a direct short-term impact on profitability. Most leading private banks, however, continue to have decent credit growth, stable asset quality, and improving return ratios.
Despite these fundamentals, valuations have corrected due to concerns around deposit competition, slower NIM expansion, and FII selling pressure. Thecorrection has certainly made valuations more reasonable compared to historical averages, not just in the private banking space but in financials as a whole, including NBFCs, HFCs, and MFIs
Defence, power, energy and pharma are emerging as market favourites. Which sector offers the best risk-reward today?
While defence, power, and energy are merging market favourites and may continue to see structural growth over the years, we believe the valuations in most of these sectors are still running ahead of time. Most of these stocks have built in huge growth assumptions with no scope for disappointment in execution. Defence also remains structurally attractive due to the government’s push for indigenisation and higher defence capital expenditure. However, valuations in several defence stocks have already rerated sharply.
Pharma offers selective opportunities, especially in domestic formulations, CRAMS, and speciality segments. Currency tailwinds will also help prop up the margins at least in the short term. However, pricing pressures in the US generics market continue to remain a challenge.
Will a shift from physical gold to Gold ETFs help reduce pressure on India’s forex reserves?
A gradual shift toward financial gold instruments such as Gold ETFs and sovereign gold bonds can certainly help reduce pressure on physical gold imports over time. India is one of the world’s largest gold importers, and gold imports significantly impact the current account deficit.
Physical gold demand leads to direct forex outflows because imports are dollar-denominated. In contrast, buying financial gold products doesn’t necessarily lead to buying of equivalent gold by the fund providers, as in a large number of cases, you might be buying from investors who would like to exit instead of the fund house ( which would lead to actual buying of the physical gold).
Over the long term, increased adoption of digital and financial gold products can help moderate import dependence, though cultural affinity toward physical gold in India remains very strong.
What are the biggest risks and opportunities investors should watch over the next 12 months?
The biggest risk remains global uncertainty driven by geopolitics, elevated commodity prices, and tighter global liquidity conditions. Persistent inflation and rising yields in developed markets could continue to pressure emerging market flows.
The biggest opportunity, however, is a correction in the commodity prices, especially the crude, if things normalise in West Asia. Being a huge importer of crude, India remains one of the biggest beneficiaries of the same. Add to that the structural growth story of the consumption and capex cycle in India.
Are Indian investors becoming too dependent on domestic inflows while FIIs continue to exit?
Domestic inflows have undoubtedly become a stabilising force for Indian markets. Monthly SIP inflows and strong participation from domestic institutional investors have reduced market dependence on foreign capital compared to earlier cycles.
However, FIIs still remain important because they influence market liquidity, valuations, and global perception of India. While domestic investors are cushioning volatility, sustainable long-term market expansion requires both domestic and foreign participation.
The positive structural change is that Indian markets are no longer entirely vulnerable to abrupt FII exits as witnessed a decade ago.
Could the weak rupee become a long-term structural theme rather than a temporary phenomenon?
Moderate rupee depreciation is likely to remain a structural trend due to interest rate differentials and India’s import dependence, especially on energy. However, this does not necessarily indicate economic weakness.
Many high-growth economies have experienced gradual currency depreciation while simultaneously generating strong equity market returns. The key factor is whether depreciation remains orderly and supported by economic growth.
India’s strong forex reserves, resilient domestic demand, and improving manufacturing ecosystem provide stability against sharp currency disruptions.
If you had to pick one contrarian sector today, which would it be and why?
While investors have focused heavily on momentum themes like defence power and engineering stocks, we believe that BFSI is the contrarian sector today. The sector has corrected anywhere between 10-15 per cent due to heavy FIIs selling, rising fears of government borrowing and a broader geopolitical anxiety, which has turned a highly stable and cash-generating sector into a value play.
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