The rise and fall of currencies correlate with the stock market. Sometimes a weaker currency helps stocks trending up; other times, it pulls them down.
Exchange rates attract great attention from merchants, investors, and economists. Knowing this relationship between exchange rates and stock prices helps them prepare for market fluctuations.
Let’s examine how changes in currency rates impact the stock market and what this means to you.
What is Exchange Rate?
Exchange rates show the market value link across several currencies in foreign exchange. For instance, the USD/INR rate is 85 if one US dollar equals 85 Indian rupees.
There are two main forms:
- Fixed (Pegged): The government or central bank decides how much its currency is worth compared to another currency, like the US dollar.
- Floating: Market forces determine changes in floating exchange rates within the global currency market. These market factors include interest rates, GDP growth, investor mood, and currency value.
What is Stock Market?
Shares owned by publicly listed companies are traded on the stock market. A company’s stock price is based on two things: how well the company is doing (like profits and growth) and what’s happening in the market around it (like the economy or competition).
How Currency Movements Influence Stock Prices?
| Scenario | Currency Change | Impact on Companies | Effect on Stock Prices |
| Export-driven company | Local currency weakens | Exports become cheaper overseas | Stocks may rise |
| Import-heavy business | Local currency weakens | Import costs go up | Stocks may fall |
| Foreign investor activity | Currency strengthens | More investment inflow | The market may gain short-term |
| Overseas earnings (MNCs) | Local currency weakens | Dollar income converts to more local currency | Profit boost possible |
Let’s analyse this further!
1. Exporters Benefit from a Weaker Currency
When the value of a country’s currency drops, its goods and services become cheaper for people in other countries. This helps companies that sell products or services overseas, like India’s IT and pharma firms.
They earn in dollars, euros, or pounds but report profits in rupees. So, if the rupee is weaker, they get more rupees when converting their earnings. This can lead to higher profits and a rise in their stock prices.
Examples:
- Infosys, TCS, and Wipro benefit when the rupee weakens against the US dollar.
2. Importers Lose from a Weak Currency
On the other hand, companies that depend on imports, such as airlines (jet fuel), oil firms, or electronics manufacturers, get hit when the currency falls.
Their costs rise since they need to pay more for the same goods. This can eat into profits, lowering stock prices.
Examples:
- Aviation firms like IndiGo may suffer during sharp rupee depreciation.
- Companies importing semiconductors or foreign machinery also face pressure.
3. Foreign Investment Flows Are Currency-Sensitive
Foreign capital investors seek returns from their investments while monitoring currency market performance.
The strengthening of a currency makes the entire market more appealing to global investors. Foreign investors increase their investment by anticipating positive stock market performance and currency appreciation.
A sharp currency devaluation can trigger investors to review their funds while conducting stock trades. Monitor Foreign Institutional Investors (FIIs) and watch the currency trends.
4. Exchange Rates and Interest Rates Work Together
With the help of interest rates, the RBI controls inflation and keeps the currency stable. Changes in interest rates often affect both exchange rates and the stock market.
- Foreign investors are more likely to invest when interest rates increase, strengthening the rupee but slowing down stock price growth.
- When interest rates go down, the rupee weakens, but local businesses grow faster, which can push stock prices higher.
Currency Value vs Stock Market
Sometimes, changes in the stock market can also impact the currency.
For example:
- A booming stock market attracts more foreign investment, pushing up currency demand.
- A crashing market causes capital flight, weakening the local currency.
Here’s a summary:
| Cause | Effect on Stock Market | Effect on Currency Value |
| Strong exports | Higher corporate earnings | Stronger currency |
| FII inflow | Market rally | Currency appreciates |
| Weak domestic demand | Low investor confidence | Currency weakens |
| Political instability | Market falls | Currency under pressure |
Real-World Examples
The Indian financial markets experience swift financial effects from worldwide events due to currency fluctuations.
1. 2013 Taper Tantrum (India)
In 2013, during the Taper Tantrum, the Indian rupee fell sharply as the US Federal Reserve signalled potential rate hikes. Foreign Institutional Investors (FIIs) massively withdrew investments from Indian markets because of the situation. During this period, stock market indices decreased, and banking industries, together with infrastructure segments, became the most affected sectors in the market.
2. 2020 COVID Shock
In 2020, the COVID-19 shock triggered global uncertainty, again causing sharp FII outflows. The Indian currency hit its most severe value decline in history. The earnings in US dollars became the primary driver of strong performance by IT and pharmaceutical stock markets during this specific period.
How Traders Can Use This Information?
Market trends and exchange rate fluctuations directly correlate, enabling traders to execute improved investment strategies.
For Stock Traders:
- Track USD/INR if you trade export-heavy stocks like TCS or Dr Reddy’s.
- Avoid import-sensitive stocks during sharp rupee falls.
- Use currency data as part of your risk management.
For Forex Traders:
- Watch for equity market sentiment to gauge currency movement.
- Use cross-market analysis, like oil prices, bond yields, and global equity trends.
Stay Ahead: Use Currency Movements to Make Smarter Stock Decisions
Exchange rates and stock prices relate daily in sectors, indexes, and portfolio returns. Understanding these interactions helps you to make better decisions, lower risk, and capitalise on world trends.
Knowing the currency value and stock market movement will enable you to stay ahead in fast-changing markets.
