Rising dollex spells bad news for Nifty

 

Riken Mehta


Follow me on Twitter @mehtariken

The US dollar index is trading at four-year high surpassing 85 levels on the upside on Thursday. The dollar index tracks greenback movement against six other major currencies. The current rally in dollar index is sparked by faster US economic growth pushing the US Federal Reserve closer to raise interest rates while the slowdown in Europe and Japan has forced central bankers to increase stimulus and boost liquidity.

As seen from the chart, the Nifty has negative correlation with the dollar index. Indian equity market banks heavily on foreign fund inflows and strength in US dollar index would accentuate selling in equities by FIIs.

The Indian rupee closed at 7-week low in trade on Thursday. FIIs have sold shares worth close to Rs 3000 crore in last three days. It would be premature to say that a deeper correction is underway but one should keep a close look at dollar index before starting bottom-fishing in the market.

FIIs sold Rs 2136cr worth stocks on Jun 20; highest in 2yrs

Ritika Dange, Riken Mehta
moneycontrol.com

According to Securities and Exchange Board of India (Sebi), foreign instituitional investors (FIIs) offloaded about Rs 2136 crore worth equities on Thursday, highest since May 13, 2011 ( Rs 3706.4 crore).

Thursday saw the Sensex tank over 500 points, its steepest crash since February 27, 2012. What triggered this sharp fall was US Federal Reserve chairman Ben Bernanke’s decision to taper the country’s monetary stimulus program- the quantitative easing 3 (QE3).

Bernanke said the bond buying program, to the tune of USD 85 billion per month, will be slowed down over the coming months and will be brought to a complete halt by mid 2014.  Bernanke’s speech sent global markets in a frenzy seeing a fall in equities, commodities and currencies as investors panicked at the thought of a slowdown in foreign capital flows into the markets.

End to cheap liquidity

Most global markets were funded for long by cheap liquidity from various countries monetary stimulus programs- the United Kingdom’s long term refinancing operation (LTRO), the Unites States’ quantitative easing (QE) and Japan’s bond buying program. Banks across the globe used this liquidity to invest in various asset classes to earn quick returns rather than lending it to borrowers to kickstart the economy as expected by respective central banks.

Double whammy

Weak fundamentals, dismal earnings, high company debts and a prolonged political logjam deterred companies from posting positive returns for FIIs on their investments.

What came as a double whammy was the depreciating rupee that saw its all time low of 59.93 against the dollar- a figure far higher from the average dollar rate of 51.80 for the past two years (May 2011-May 2013). This translates into a 15 percent loss for the FIIs on currency conversion based on the current exchange rate of rupees 59 per dollar.

As a testimony to the weak sentiment prevailing among investors, FIIs pulled out capital worth Rs 1768 cr (provisional) from equities on Friday.

Chart: FIIs sold bonds worth Rs 27000 cr since May 22

Riken Mehta
moneycontrol.com

Bond market has witnessed an unprecedented sell-off by foreign institutional investors over the last one month. That is because the weakness in the rupee, and a simultaneous rise in bond yields of US government bonds has made it profitable to sell Indian debt and buy US debt.

FIIs have sold debt instruments worth Rs 27145 crore since 22 May, as per Sebi data. In the same period, the rupee has shed over 7 percent, hitting a fresh all-time low of 59.91 on Thursday.

Currently, yields on 10-year US treasury note is around 2.4 percent, while it is around 7.3 percent for Indian 10-year benchmark yield.

"However, when FIIs take an exposure in Indian bonds, they have to hedge it against exchange rate risk, which comes to around 6 percent. So, the effective return for FIIs comes to 1.3 percent (7.3 percent minus 6 percent) as of now in Indian bonds, in comparison to 2.4 percent offered in US 10-year treasury note," SBI deputy managing director and group executive for global markets P Pradeep Kumar told PTI.

Will rupee slide speed up FII selling of Indian shares?

Santosh Nair, Riken Mehta
Moneycontrol.com

Finance minister P Chidambaram Thursday tried to pacify jittery markets, saying foreign capital flows were strong enough to bridge the current account deficit. But will the flows sustain going forward?

Theoretically, a weak rupee provokes foreign funds into selling Indian equities, as it would lower their portfolio value, if the stocks have not been performing.

Assume a foreign fund buys one share of a company for Rs 52 when the rupee was 52 to the dollar. If the stock price remains constant, and the rupee depreciates to 57 to the dollar, the value of the portfolio is now less than 1 dollar. But if the stock had risen to Rs 62, the foreign fund would not be worried, since the appreciation could more than cover up for the weakness in the rupee.

India is among the emerging market countries which have gained from the low interest rate policies of the US Federal Reserve and the European Central Bank. Generous dollops of liquidity resulting from those policies found their way into Indian shares, keeping share prices higher even during periods of weakness in the rupee.

But now market is not so sure if the liquidity flows will sustain, as there are doubts that the Fed may now start cutting back on its monetary stimulus.

Since the big sell off in global markets a couple of weeks back on these concerns, foreign fund flows into India have slowed.

And there is bad news on the debt front as well. FIIs have net sold close to Rs 4000 crore of Indian debt as bond yields are softening in anticipation of a decline in interest rates.

If capital flows slow down at this stage, this could trigger a vicious cycle of weakening rupee and foreign fund outflows.