Krishna Karwa Moneycontrol Research
India’s benchmark indices, after witnessing a great run in recent times, turned choppy primarily due to rising crude prices and a steep depreciation in the rupee against the US dollar.
In the US, the possibility of rate hikes by the Federal Reserve, hardening bond yields and signs of economic growth triggered an outflow of funds from relatively high risk and volatile emerging markets (EMs) by foreign portfolio investors. Consequently, the dollar has strengthened against all emerging market (EM) currencies lately.
In the past 10 years, Nifty movement and bond yields have been inversely related, though not considerably.
In 2013, the US Federal Reserve’s tapering of bond purchases with an intent to trim interest rates resulted in a currency crisis globally. The consequent steep increase in bond yields during the year led to a significant depreciation of the rupee (and all EM currencies as well) versus the dollar, especially from May to August (the effect spilt over into the initial days of September as well).
During this 4-month period, Nifty underperformed quite noticeably, which eventually took a toll on overall benchmark returns for the year as a whole.
In 2018, the situation appears similar, albeit not entirely. While the rupee continues to remain in freefall mode of late, the scenario is no different for other EM currencies.
Bond yields have been inching up on the back of inflationary pressures, higher crude prices, widening of the fiscal deficit, an unfavourable current account deficit and prospects of rates being hiked by the Reserve Bank of India during the course of the year.
After registering a record high of 11,738.5 on August 28, the Nifty has been on a downtrend, whereas bond yields have breached the 8 percent mark.
Despite the ongoing volatility in India’s financial markets, the Nifty has delivered a reasonably healthy return of 8.3 percent so far since January, which is in stark contrast to its performance in 2013.
What lies ahead for equities? While the Indian market, like other emerging economies, is bearing the brunt of continuous selling by foreign institutional and portfolio investors since the past few months, domestic institutional investors have consistently supported it through periodic inflows. This trend is expected to prevail going forward too. This wasn’t the case in 2013.
The growth outlook for some blue-chip stocks, which constitute a major chunk of the Nifty in terms of market capitalisation, appears quite positive. Consequently, the index has managed to be resilient, notwithstanding some minor disruptions along the way.
Therefore, we don’t see a depreciating rupee against the dollar derailing the equity market. It is more like a speed breaker that provides long-term investors an opportunity to accumulate stocks at reasonable valuations.
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