Dollar spoils the mood in equity, currency markets

Indian equity and currency markets weakened on Tuesday, along with other emerging markets, as investors were cautious about the impact of the dollar strengthening to a 12-year high against the euro and a seven-and-a-half-year high against the yen.

The rupee closed at a two-month low of 62.78 a dollar on Tuesday (it had closed at 63.18 on January 7), while the BSE Sensex closed at 28,710, 4.4 per cent lower than its record intra-day high of 30,024.74 on March 4.

The depreciation of the rupee was despite the Reserve Bank of India (RBI)’s intervention in the currency market. Other emerging equity and currency markets also fell. The bearish mood spread from Asia to Europe, where stocks lost for a second day.

Ultra-low interest rates in the US and monetary stimulus have helped global equity markets post strong gains through the past few years. Analysts fear if the US raises rates, it could spell trouble for stock markets, as investors will shun risky assets.

Hitendra Dave, head (global markets), HSBC India, said the trajectory of the US interest rate rise would be more important than its timing. “If one gets a sense the rise will be more than the consensus estimate, you will have a hit on global financial markets, not just in India. Indian markets could be partly insulated from turbulence, as the country has improved its foreign exchange reserves and narrowed its current account deficit with a fall in crude oil prices,” he said.

RBI’s foreign exchange reserves hit an all-time high of $ 338.08 billion, showed data released by the central bank on Friday.

“Reports of heavy dollar buying in the offshore market and fear of the exit of foreign portfolio investors (FPIs) from Indian equity markets continue to weigh on the rupee,” said Suresh Nair, director, Admisi Forex. However, despite the weakness against the dollar, the rupee has appreciated 0.41 per cent so far this year. On December 31, 2014, it had closed at 63.04 a dollar.

Experts say the pace of dollar strengthening globally will weaken the rupee. Though foreign exchange reserves were at an all-time-high and FPIs continued to be interested in Indian debt, the dollar’s gain was a dampener, experts said.

“There was some dollar selling by state-run banks, possibly due to intervention by RBI. Foreign flows have been coming into debt but the bias for the rupee is towards weakening. The currency is heading towards 63/$ ,” said Sandeep Gonsalves, foreign exchange consultant and dealer, Mecklai & Mecklai.

Analysts said the rupee was reacting to a sharp weakening trend across emerging markets and Asia.

On Tuesday, the Korean won dropped to its lowest against the dollar since 2013 and the rest of the pack, too, is bleeding. Over the near term, analysts expect the pair trade within 62/62.4-63.5 to a dollar.

Prospects of higher rates have helped the dollar outperform most global peers this year, as central banks in Europe and Japan seek to boost stimulus. So far this year, the dollar has rallied 6.3 per cent, the second-most (after the Swiss franc) among the 10 developed market currencies tracked by the Bloomberg correlation-weighted currency index. The yen has gained 4.3 per cent, while the euro has lost 6.4 per cent.

An analyst with HDFC Securities said investors in Indian stock markets were worrying a rate rise in the US could derail the markets, following a stronger-than-expected jobs report in the US in February. “We believe a rate cut in June is not much of a surety, as the markets might be worrying. Only time will tell what will happen in the US in June and how the language of the Federal Open Market Committee changes next week,” said an analyst.

Shane Oliver, head of investment strategy and chief economist, AMP Capital, said: “Shares are at a risk of correction, with the US Fed’s progress towards a rate increase being the main potential trigger.” He, however, said the broad trend in equities remained positive, as the “monetary policy is set to remain easy, with further easing in Europe, Japan, China and Australia and only a gradual tightening in the US”. Most brokerage firms expect Indian markets to rally another 10 per cent to 15 per cent in 2015.