Earnings at risk if Indian Rupee extends advance, Edelweiss says

India stock bulls, beware. A stronger currency could spoil the party. A further advance in the rupee to 62 per dollar in the year to March 2018 could shave four percent off the NSE Nifty 50 Index’s earnings growth, according to Edelweiss Securities Ltd.

Nifty companies are vulnerable to foreign currency swings because nearly half the index’s profits are linked to the global economy through exports, overseas subsidiaries and commodity prices, the brokerage said in a note dated April 17. Earnings per share of the Nifty members may grow an average 28 percent this fiscal year, according to analysts’ forecasts compiled by Bloomberg.

Gains in the rupee, Asia’s best performer in the past three months, have underpinned a rally that sent Indian equities to all-time highs this month. The correlation between the two asset classes has “probably played out,” Mumbai-based Edelweiss said. The Nifty has climbed 12 percent since Jan. 1. The rupee has risen 5.2 percent against the dollar to 64.5, surpassing the broker’s forecast of 67.

Still, the correlation between the two asset classes may be as strong as it was over 2006-2008 when the rupee rallied 11 percent, the brokerage said. This time around, they may not move “as dramatically” as the currency’s outperformance versus emerging-market peers has come amid modest global growth, according to the report.

The rupee’s gain between January and March was the most for any first quarter since 1975, as foreigners bought over $12 billion of stocks and bonds after a resounding win for Prime Minister Narendra Modi’s party in key state polls boosted bets for more economic reforms.

National Stock Exchange of India Ltd (NSE)