The US Federal Reserve’s decision to curtail its liquidity measures with a goal of ending it in mid-2014 weighed on Indian equities and the rupee. After the Fed chairman said that the US economy was expanding strongly enough for the central bank to consider slowing $85 billion of asset purchases, the Indian market recorded its highest single-day fall since September 2011 and closed at it two-month low.
Fears of a slowdown in foreign fund flow took the steam out of the rupee as well, as traders feared that developed markets like US would be preferred over emerging markets that are facing stronger inflation pressures. Even as the outflows were observed for nearly 10 days, after the exits of Thursday and Friday the outflow from equities stood at about $1 billion in June. The debt market on the other hand witnessed $3.2 billion of money exiting the market.
Market participants are expecting the fund flow to remain week in the coming weeks while the domestic macro issues including sticky current account and fiscal deficits amid slowing economic growth are seen keeping the equity market capped at higher levels. Even the upcoming general election is expected to increase political risks due to frequently changing alliance equations among various political parties.
However, at current juncture, the valuations of Indian market and hopes of bottoming of the earnings cycle are considered as mild factors of positivity. The likely downward trajectory of the interest rate as the central bank takes cognizance of falling inflation, was termed as a big positive until last month. The recent plunge in the rupee’s value to its all-time low of close to 60 against the dollar has shaken these hopes even as plunge in global price of commodities like oil and gold should ideally support India’s CAD which in the the third quarter of the current financial year stood at 6.7% of the GDP.
We have been bearish on the equity markets since late January. Near term, we believe the pressure continues. Growth is below trend and monetary transmission is taking time. The recent sharp depreciation in the rupee, if sustained, will pressure inflation and the fiscal deficit. Currencies of most emerging markets that are dependent on external capital are selling off. The Fed has not said that it will immediately slow down the stimulus programme. But markets are understandably nervous about the event and its implications and are