As going gets tough for Re, will it get rougher for Nifty?

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."
~Anonymous

 

It has been a disheartening day for investors and traders as they watch global markets finding a spring in their step while our market just can’t get its head out of this 4,850-4,900 range. After starting with a gap up this morning at around 4,950-4,960, market players were hoping that 5,000 may be the next target.

Today’s market closing saw the Sensex and Nifty fall as much as 1.1%, weighed down by the sharp depreciation in the rupee. The BSE benchmark lost 156.85 points or 0.97%, to close at 16,026.41 while the NSE benchmark touched an intraday high of 4,956.35, before closing down 45.55 points at 4,860.50.

CLICK HERE to catch up on all of today's market action..

Sudarshan Sukhani of s2analytics.com says it has been a disappointing session post noon where the market was in a trading range for two days 4,900-4,950. Once 4,900 broke, we closed our long positions and actually went short. “Now that doesn’t mean this market is going down but it tells us that the short-term trend has flipped fast and rapidly. It is difficult to say what will happen but this is the current positioning,” he adds.

But with the rupee tumbling still further to another record low of 55.42 on demand for the greenback from importers and corporates, we were unable to hold on to that gap at all.

Rumblings in Rupee leave RBI Rattled

Plunging to a new lifetime low, the Reserve Bank of India has imposed restrictions of USD 100 million on "position limit" for forward contracts by banks.

Selling pressure emerged after FIIs began selling their positions despite the central bank’s measures to support the falling domestic currency. Foreign investors usually sell Indian shares whenever the rupee weakens as the value of their portfolio declines. However, unlike on previous occasions in the last four years, the sharp depreciation in the rupee since January this year has not been accompanied by huge foreign fund outflows.

Experts argue that it is a bit unfair to expect the RBI to take any more incremental steps, which can possibly takeaway a little bit of speculative demand, bring in a little bit of supply etc. With a policy paralysis plaguing the UPA government, the apex bank is nonetheless hoping for a lending hand at some point to help them out in order to take some tough policy decisions. This in turn can improve the attractiveness of the country as an investment destination. 

Portfolio manager PN Vijay says the RBI cannot imagine cutting rates when it has a double digit inflation number to boot. He sticks to what global researchers are talking about - maybe another 75 bps rate cut by the end of the calendar year. “I would say that inflation is not the only thing on the RBI’s mind when they talk about interest rates,” he adds.

Rupee: Worse Case Scenario Now

The rupee has shown no signs of pulling up despite that brief flurry in the morning where it went to about 54.50-54.60 to the dollar. We are back to above 55, so new low for the rupee and a struggle for the stock market after a gap up opening. That’s been the picture today.

Mehraboon Irani, principal and head-private client group business, Nirmal Bang Securities tells CNBC-TV18 there is so much pessimism in the air that all eyes are on how the rupee plays out going ahead. “I will not be surprised if this pullback will possibly gather some steam only because of the fact that virtually every man on the street is still very negative. “

Also Read: RBI unable to arrest rapid fall in rupee...who else can?

e continues to remain negative while stating that in the very short run, even if this rally gathers some steam, in the days ahead the possibility of us coming down very sharply from that higher level is very much on the cards.

Irani’s view is if the INR goes to, God forbid 55.80 or even 56, possibly it will go back down to test the level from where we have been trying to rebound.

Until the rupee keeps trading above 55, our market rallies will probably be short-lived and India will start underperforming global markets in a big way again.

Return to Risk Appetite?

While globally, markets saw a mild bounce back in risky assets, there are bigger and more important pressing topics which still need to be addressed. Weighing on market sentiment heavily is Wednesday’s EU summit meeting which will be hard pressed to deliver any real support for European markets.

As a widespread run on banks is what is keeping euro zone ministers awake at night, European markets do appear confident that rescue funds will be put in place swiftly so that direct action can be taken when called upon for bank recapitalisation.

The tone set by the G8 over the weekend has markets working under the assumption that before Greece’s election takes place on June 17, the European Central Bank might cushion in a safety net for the beleaguered nation, hoping that it stays part of the 17-bloc euro group.

Globally also there is so much of expectation from Germany's Merkel, France's Hollande and the US' Obama, says PN Vijay. “The level of anxiety and uncertainty makes it a very unusual situation for the world to be in.”

Chelsea Saldanha
chelsea.saldanha@network18online.com