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Explained: Why are markets, rupee falling?

The benchmark Sensex was quoting 1,422 points down at 52,881.23 and the Nifty Index was trading 408 points lower at 15,793.15 as of 12.15 noon IST.

Written by George Mathew | Mumbai |
Updated: June 14, 2022 6:56:34 am

Domestic stock markets and the rupee faced rough weather in early trading on Monday as the sharp rise in US inflation triggered concerns over more aggressive rate hikes and stronger capital outflows. The benchmark Sensex was quoting 1,422 points down at 52,881.23 and the Nifty Index was trading 408 points lower at 15,793.15 as of 12.15 noon IST. The rupee plunged below the 78 mark to 78.28 against the dollar in the opening session.

Why the crash?

Indian stocks fell 2.6 per cent in the opening session as equity markets across the globe are witnessing a sell-off after US May inflation data accelerated to four decades high of 8.6 per cent, raising concerns about aggressive rate hikes by the US Federal Reserve in the upcoming monetary policy meeting due on Wednesday. US treasury yields surged to a 14-year high at 3.15 per cent while the dollar index spiked above 104 levels. US futures are also down by one per cent after the big sell-off on Friday. Apart from this, the market would continue to remain cautious ahead of various central banks meetings this week.

On the domestic side, as India’s inflation data is due on Monday, investors are nervous about the RBI’s next plan of action. If retail inflation rises further and crosses 8 per cent level in India, the RBI could increase the policy rates again this month. Yield on India’s 10-year benchmark bond has risen by 7 basis points to 7.59 per cent on Monday.

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Overall, domestic and global worries are hurting the sentiment in India. The withdrawal of liberal accommodative policies in India and other countries, mainly the US, is prompting the investors to press the sale button. Capital outflows by foreign portfolio investors are likely to continue in such a scenario.

Why is the rupee down?

The rise in US inflation, rate hike worries and the stock market fall are weighing on the rupee sentiment. More rate hikes by the US Fed will lead to higher outflows on the part of foreign portfolio investors (FPIs) who have already pulled out Rs 18,814 crore from the stock markets in June so far. FPIs have taken out Rs 2.40 lakh crore from India since January this year, putting pressure on the rupee.

The rupee fell below the 78 level against the dollar on Monday morning as the RBI was not seen selling dollars. The fall in the rupee is likely to make imports costlier and exports lucrative. “We might see more weakness ahead of the FOMC meeting on June 15, where the Fed is expected to hike rates by 50 bps and showcase a more aggressive tone. However, runaway depreciation might not happen amid RBI intervention,” said Jigar Trivedi, Research Analyst, Anand Rathi Shares & Stock Brokers.

When will markets recover?

The Indian market will stabilise only when the US market stabilises and the rate hikes by the US Fed stop. The market will bounce back when FPIs return and start pumping money again. “Therefore, investors may wait and watch till clarity emerges on the market trend. One silver lining is the 7.1 per cent increase in IIP which indicates that the Indian economy is doing well,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

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Analysts said investors should stay invested if they have a long-term investment plan and mutual fund investors should continue their SIP plan without breaking the investment. On the other hand, the big correction will give an opportunity to investors to pick up good quality stocks at attractive levels. “Investors should wait and watch the unfolding situation before making any major commitments. Buying should be confined to stocks/ segments which are fairly valued or have good earnings visibility,” said an analyst.

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First published on: 13-06-2022 at 01:45:36 pm
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