By now the cat's out of the bag: The Reserve Bank of India cannot fight the run on the rupee.
From a macro standpoint, India's prognosis is a pretty difficult one to put a positive spin on, except perhaps that it's probably not too late for a shorting opportunity. The rupee is at historical lows, foreign portfolio flows are low and going lower, and retail inflation at more than 10 percent handcuffs the central bank's ability to cut interest rates further. And so a cycle has begun of rupee weakness driving higher inflation, which will drive further rupee selling.
RBI authorities have gone on the record several times now promising further measures to stabilize the rupee, though at least one unnamed central banker has already admitted defeat. Regardless, what sorts of measures are left is anyone's guess short of burning through FX reserves, though even that has its limits--estimates vary, but FX reserves stand somewhere under $300 billion, enough to cover India's imports for six months, with both numbers dropping as I write this. Meanwhile, India's other fundamentals are hardly more inspiring:
Click to enlarge.
Now that we know where the rupee is heading, how bad will it be for Indian ETFs and stocks? Under "normal" circumstances, looking for Indian companies with high dollar-denominated revenues could be a way to play this, but the RBI has even officially discouraged that option as well. Comparing the ETFs EPI, INP, the ETN IFN and Wipro WIT and Infosys INFY against the rupee (the black line below) since 2008 gives us the following chart:
What is surprising here is not that these share prices are correlated to the rupee, but that the share price moves are as amplified as they are. If price behavior since 2008 is any guide, the two new conclusions from the above chart seem to be that a) whatever happens to the rupee is but a fraction of what happens to ETF and ADR shares, regardless of direction; b) Wipro and Infosys, even aside from dire company-specific considerations, do not face an enticing macro environment. After reaching December 2010 highs, both share prices are currently back at May 2008 levels and appear to be starting their second leg down right about now. This is only the beginning.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.