The Indian equities and currency markets could witness hectic buying and selling this week with the US Federal Reserve likely to raise interest rates during this period, which would lead to an outflow of foreign funds from Indian markets and pull down share prices.
The impact is already seen on equities and the rupee, with the currency falling to a two-year low of 66.88 against the US dollar last week. Forex dealers are eyeing a 70-to-a-dollar level for the rupee.
On Friday, the Sensex fell 208 points, or 0.8%, mainly due to fears of foreign outflows — foreign portfolio investors (FPIs) have already sold Rs 5,500 crore worth of Indian shares in the month so far. This is likely to rise in the coming days as FPIs would prefer to invest in the US dollar, which would gain once interest rates are raised, signalling growth trends in the US economy.
Muted corporate earnings during the July-September quarter also hit trading sentiment.
“Corporate profit to GDP has fallen from over 6% in 2009-10 and 2010-11 to below 4% in 2015-16,” said Ramdeo Agarwal, co-founder of Motilal Oswal. “The next 3-5 years could see corporate profits rising to higher levels. Bottoming out of commodities and meaningful pick-up in investment cycle should lay the foundation for long-term recovery of earnings.“
Apart from the Rs 5,500-crore sell-off in December so far, foreign investors had already sold Rs 7,074 crore worth of shares in November. But the fall will be contained in the medium term as India’s business cycle is in the initial stages of a recovery, according to Japanese brokerage Nomura.
There is similar apprehension regarding the rupee as well. Forex dealers in Mumbai expect the Indian currency to touch 70 soon, which can spike imports, fuel inflation and increase companies’ debt payments.
“But this will be factored as the RBI has strongly indicated it will not hesitate to intervene if the rupee falls,” said Saugata Bhattacharya, chief economist of Axis Bank. Typically the central bank would sell dollars to balance any local shortfall of the American currency.
According to Indranil Sen Gupta, India economist for DSP Merrill Lynch, the RBI will need to inject $8-10 billion through open market operations “with FPI equity flows likely to stall till markets price in the first Fed hike that we expect on December 16 and earnings turnaround that we expect in the December quarter.”