Markets drown in FII outflows

Dollar carry trade unwinding drags down stocks, rupee

Equities dropped to their lowest in two months and the rupee hovered near its record lows as selling by foreign institutional investors (FIIs) kept financial markets on the edge.

Fund managers said unwinding of carry trades funded by the dollar across emerging markets, in the wake of worries about a rollback of stimulus by the US Federal Reserve, might continue to weigh down stocks, rupee and bonds in the near term.

In dollar carry trades, investors borrow in the US at near-zero interest rates and invest these in emerging markets for higher returns. The strength in the dollar against various currencies such as the rupee is prompting them to cut these positions. (THE BEATING CONTINUES)

FIIs net-sold shares worth Rs 1,553 crore on Monday, according to provisional data, extending their sales in Indian equities to the 11th straight day. In June, these investors net-sold shares worth Rs 9,600 crore after pumping in close to Rs 80,000 crore from January to May-end.

“Selling by FIIs is likely to continue for a couple of more sessions, as investors are unwinding their carry trades due to the ongoing concerns around tapering of QE3 (third round of US quantitative easing),” said Rajesh Cheruvu, chief investment officer of RBS Private Banking.

Worries about continued FII selling resulted in India’s volatility index (Vix) — a measure of traders’ expectations of near-term market risks, based on Nifty options prices — advance 10.4 per cent to 21.01, the highest in a year.    

The Sensex fell 233.35 points, or 1.24 per cent, to close at 18,540.89 on Monday. NSE’s Nifty declined 77.40 points or 1.37 per cent to close at 5,590.25.

“The worst may not be over for the Indian market and the currency if FII selling continues as part of a general risk aversion to emerging markets,” said Sanjeev Prasad, senior executive director & co-head, Kotak Institutional Equities.

The rupee weakened against the dollar on Monday due to dollar buying by foreign banks and month-end dollar demand by oil importers.

The Reserve Bank of India’s dollar selling moderated the rupee’s volatility. The rupee fell to close at Rs 59.68 a dollar on Monday from Rs 59.27 on Friday. Earlier this month, the rupee had touched an all-time low in intra-day trades at Rs 59.98.

The outlook for the rupee continues to be weak. Samiran Chakraborty and Priyanka Kishore of Standard Chartered Bank said the immediate resistance for the dollar-rupee was at Rs 63.

“The rupee is the most worrisome factor at this point. It is closer to the psychological level of Rs 60 against the dollar. There is not much hope of improvement in the next three-six months,” said Manish Bandi, fund manager, India Infoline Asset Management.

Benchmark indices could correct two-three per cent, Bandi said, while the mid- and small-cap segments could decline five-10 per cent.

RBS’s Cheruvu said: “Once the market falls another two-four per cent, there could be a relief rally, as valuation attractiveness kick in.”

Bond yields rose on Monday, posting their worst weekly loss in nearly a year as FIIs sold heavily in this market, too. The yield on the 10-year benchmark government bond ended at 7.52 per cent, compared with the previous close of 7.43 per cent. In June, FIIs have pulled out $4 billion from domestic debt.

Commodities, too, fell on Monday, tracking the weakness in equities and bonds. Copper tumbled 2.3 per cent to hit a three-year low of $6,613 early Monday on the London Metal Exchange. The Brent crude oil price slipped below $100 a barrel, the lowest in three weeks, gold tanked 1 per cent to trade at $1,283 an oz.

Slowing consumption growth in China also threatened commodities’ upward bias. Standard gold in Mumbai’s Zaveri Bazaar fell 1.11 per cent or Rs 300 to close on Monday at Rs 26,840 per 10 g. Silver plunged 1.81 per cent or Rs 780 to close at Rs 42,220 a kg.