How devaluation of rupee affects the Pakistan Stock Market |Top 5 Reasons|
Devaluation means when the value of a currency depreciates or decreases with respect to other currencies or Gold. Devaluation and depreciation are two interchangeable terms where the value of a currency reduces in a fixed exchange system. And monetary authority will be liable for setting up a fixed exchange rate in relation to foreign currency.
Value of currency is determined as per rule of supply and demand. Devaluation will be helpful for rectifying or lowering the trade deficient in the balance of payment. We often hear a news of Rupee devaluation, but how it impacts on stocks and investors behavior. Let’s have a look at it.
The market value of the U.S. dollar has an impact on every segment of the economy, including the stock market. A strong dollar is synonymous with decreasing equity prices, while a weaker dollar can cause stock prices to rise.
Rupees devaluation in Pakistani history
- Pakistani currency was first devaluated back in 1955 due to uncontrollable or inflationary pressure.
- In !972 the Pakistani rupee was Devaluate up to 56.7% with respect to gold.
- in 1982 when Pakistani Rupee was unhitched itself from the U.S dollar, the massive devaluation was seen.
- In 2001 the devaluation rose to 61 rupees for one dollar. The rate was stable from 2005-2006 and 1 dollar was equal to 59-60 Rupees.
- In 2008 it rose up and rate became 63 per one U.S dollar.
- As per 2018, 1 USD dollar equals to 115 rupees.
Every country depreciates the value of their currency due to the following reasons
- To accelerate the exports:
- To lower the trade deficient
- To decrease the sovereign debt surgeries
Currency Devaluation increase the stock market volatility
Volatile is a term used to determine the uncertainty or risk for a particular stock value. Volatility is measured in terms of beta, Every time when the Pakistani Rupee devaluate it had its severe impact on the stock of Karachi stock exchange 100 indexes. The stock return becomes more unpredictable and makes an investor ambiguous. See also online jobs in Pakistan
Devaluation of rupee repel the foreign investor
Devaluation of currency excels the price of stocks. Generally, foreign investors find it more economical or less expensive. In case of severe or sudden devaluation International investors and their fund managers who are willing to invest in the stock market before devaluation. They now rather evaluate the emerging stock returns and wait for the rupee stability in the foreign exchange market and it ceases them from taking any action.
Currency devaluation and its adverse effect towards oil sector:
Pakistan imports it’s crude oil from The United Arab Emirates (USD 1099 million) Qatar(USD 14 million) and Saudi Arabia(USD 869 million), every time the value of the rupee lowers it abruptly raises the price of oil sectors and the interlinked or conjugated sectors like power generation, and others. as Pakistan that first was paying less in exchange rate will have to pay more.
The instability of rupee is precarious for investors:
The random or sudden decrease in the currency value will deviate the investor’s behavior. They will feel reluctant investing their hard earned money in such unpredictable or indecisive conditions. It ultimately ceases their trading of stocks in Karachi stock exchange 100.
Investors will prefer to stay on the sideline until the macroeconomic woes get settled, and stock market becomes more stabilized.
Devaluation of Rupee creates an opportunity for the investors:
Every time devaluation of Pak rupee creates an uncertain scenario in Pakistani economy especially in Karachi stock exchange 100 indexes as it makes the values of stocks cheaper. It creates an opportunity for the investors to buy their portfolio of investment at the relatively cheaper rate.
Some interesting Facts about Karachi stock exchange 100 indexes with the devaluation of rupee
- Pakistan is the developing country with an average GDP (Gross domestic product) per capita $4,900 that ranked it in 133rd of the world, and its Developing HDI is 0.54. The studies predict if the country is developing like Pakistan than the larger devaluation will severely impact on its stock market.
- The stock market will decline more if the exchange rate has depreciated in past years e.g. Pak rupee has always remained plunged in Dollar, its depreciation movement remains uncertain in prior years. E.g. in 2017 Pak rupee fell to 109, and in 2018 one dollar is equal to 115.
- The stock market will decline with currency devaluation if the credit rating or foreign reserves are lower. Pakistan is not fortunate in terms of foreign exchange reserves as it ranked at 71st position with the average reserves of 11,944 as per the recent report published on 18th March 2018