India’s benchmark stock indices posted their first weekly gain in five after the rupee’s tumble to a record low fired up export-focused companies, but it might be too early to rejoice as earnings are set to take a knock in the wake of severe cash crunch that has taken a heavy toll on consumer spending in the subcontinent.

Gains of 4.8-5.8 per cent in shares of software exporters Tech Mahindra, Tata Consultancy Services and Infosys Ltd, and rises of 4-4.4 per cent in Sun Pharmaceuticals and Aurobindo Pharma, on Friday lifted the 50-share Nifty 1.9 per cent to 8,114.30 and the top-30 Sensex gained 1.8 per cent to 26,316.34. The rally helped the indices nudge up 0.5 per cent and 0.6 per cent respectively for the week.

The rupee fell to 68.865 against the dollar on Thursday, weakening beyond the previous record of 68.845 on August 28, 2013. A weaker rupee bolsters revenue and earnings of export-led companies. On Friday, the rupee strengthened 0.4 per cent on intervention by the central bank, and is expected to hover around 68 by the year end.

“The rupee’s fall is mainly due to the dollar’s strength against other currencies in anticipation of a Fed rate hike,” said equity strategist V. Venugopal. “It should stabilise quickly, but there will be pain for the stock market over the next 2-3 months from the fallout of the demonetisation drive.”

Prime Minister Narendra Modi’s shock announcement on November 8 to withdraw high-value bank notes of Rs. 1,000 and Rs. 500, which together contributed 86 per cent of the total currency in circulation, has caused distress. The decision, aimed at curbing “black money” or unaccounted hoards and counterfeit currency used by militant groups, has squeezed cash with people, affecting consumer demand.

Foreign funds have dumped shares worth $1.9 billion so far this month, bracing for a slowdown in economic growth and corporate earnings.

“Corporates will see economic activity decline, with lower sales volumes and cash flows. Those directly exposed to retail sales will be most affected,” Laura Acres, a senior official at Moody’s Corporate Finance Group, said in a report.

Strong headwinds

Brokerage Edelweiss estimates that the acute cash shortage with consumers could blow a hole of 20-40 per cent on sales of fast moving consumer goods of daily use. Biscuits and salty snacks sales as well as personal care products such as soaps, shampoos and detergents have taken a big hit, according to market research firm Nielsen.

Former prime minister and economist Manmohan Singh, speaking in parliament on Thursday, said the logistical nightmare of replacing sufficient bank notes would pull down economic growth by two percentage points on a conservative basis. Several foreign securities houses such as Goldman Sachs, Credit Suisse and Citigroup also see economic expansion slowing between 0.5 to about 1 percentage point.

Ambit Capital, a local brokerage, has warned GDP growth could dip below four per cent in the coming quarters, threatening the more than 7.5 per cent target in the current financial year to March 2017.

Moody’s says the disruption of economic activity would hit companies exposed to direct retail sales such as telecom and auto, and also those that depend on sales in rural areas such as farm equipment manufacturers.

The Centre for Monitoring Indian Economy (CMIE), an independent think tank, said there would be bigger costs for the economy. It estimated the transaction cost of the demonetisation exercise at more than Rs. 1.28 trillion over the 50-day period until December 30 — the deadline set for depositing the scrapped notes in banks.

“However, the impact of low liquidity, broken supply chains and loss of confidence in consumers is likely to impact the economy over a longer period,” Mahesh Vyas, managing director of CMIE, said in a report.

Losses abound

The stocks rebound came after the widely tracked Sensex fell 6.8 per cent since November 8, and even after Friday’s rise the benchmark is down 5 per cent.

Among the investors who have seen the value of their holdings drop include that of Rakesh Jhunjhunwala, often called India’s Warren Buffett. The billionaire investor along with his wife Rekha lost about Rs. 10 billion over 11 days, according to Bloombergquint.com.

Titan, Delta Corp, Dewan Housing Finance, NCC and Escorts were the biggest losers, shedding 11-15 per cent, among the 25 companies in which they hold significant stakes.

Nemish Shah, another big-time investor, lost 8 per cent or Rs. 2.65 billion off his portfolio, with MRF dropping nine per cent, the news website said.

The rupee, which is also under pressure from redemption of about $20 billion of foreign currency deposits issued to non-residents three years ago, has dropped 2.5 per cent this month. The slide, however, is far less than the 8.1 per cent plunge in August 2013 when the economy faced rough weather. The decline is also lower than the drop in other regional currencies such as the Malaysian ringgit or the Indonesian rupiah.

The Indian currency is likely to ride out the storm without much ado. The current-account deficit was $0.3 billion for the June quarter, compared with $21.8 billion in the same period in 2013. Foreign exchange reserves on November 18 stood at $365.5 billion after hitting a record $372 billion at the end of September.

Grab the opportunity

All said, even given the near-term bearish trend, the underlining fact remains that the longer term outlook is decisively bullish. Many economists believe the drive to clean up the parallel economy would set the stage for stronger growth in the next financial year.

“Although the measures in the near term will pressure GDP growth and thereby government revenues, in the longer term they should boost tax revenues and translate into higher government capital expenditure and/or faster fiscal consolidation,” Marie Diron, associate managing director in Moody’s Sovereign Group, said in a statement.

It would also be worthwhile to note who are scooping up falling shares. Among the buyers are promoters of companies such as Ambuja Cements, JSW Steel, Marico, Piramal Enterprises, Glenmark Pharmaceuticals, MRF, Shriram Transport Finance, Mindtree, IPCA Labs and Force Motors, according to the Economic Times.

“It’s extremely important for investors to track the insider activities of the company during the current situation. When promoters buy shares of their company, it indicates that their business is undervalued and hence they see long-term value in it,” the newspaper quoted Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services, as saying.

Cash-flush domestic funds are net buyers of $1.8 billion of stocks this month, providing a foil to the outflow of foreign funds.

The writer is a journalist based in India.