Cross currency rates impact equities

Gyrations in the major cross currency rates are taking a toll on the quantum of foreign fund inflows.

Market entities argue that the foreign funds which had tapped the Indian markets with a currency view may have rebalanced their portfolio in the last fortnight.

But opinion is divided whether the rebalancing has fully factored in the expected rate hikes in the US. If the rebalancing activity is over, the markets can draw some respite on the back of fresh FII inflows and lack of selling pressure.

But if there are surprises in the currency markets, and the rebalancing is not yet over, the Indian markets could see a few rounds of sharp volatility as capital exits the equity markets.

The consensus is that now the currency movements will compete with domestic earnings growth to determine the course of the Indian markets.

"A spike in the dollar vs euro played in an already nervous markets last fortnight, and we saw local traders dismantle leveraged positions fearing FIIs sell off," said Deepak Chhabria, COO - institutional equity at IL&FS Investsmart.

The FIIs have been net sellers in the first fortnight of January.

Sashi Krishnan, CEO at Chola Mutual Fund said, "The market volatility over the last few days had been high, mainly because market players feel that FII inflows may slow down as the US may go in for a strong dollar policy and the Fed may go in for higher than anticipated hikes in interest rates."

As a result of these expectations seeping into the market, local players have also booked some profits at higher levels, he added.

Ved Prakash Chaturvedi, CEO at Tata Mutual Fund, agrees currency movements have played a major role in determining the course of the markets.

"The rupee appreciation against the dollar seems to have moderated, at least for the time being, and hence some of the significant FII inflows that were coming here have also moderated," he added.

Nilesh Shah, CIO at Pru ICICI MF, says, "From an analytical point of view, there was a correction in euro/$ from 1.36 levels to 1.30 level. This could have prompted some reversal in the flows from some of the FII which came with a currency view."

Nandan Chakraborthy, head of research at Enam Securities says, "The basic trigger for the fall in the Indian markets in the first half of January was the hawkish anti-inflationary stance of the Federal Reserve of the US. Expectations of small but continuing rises in US interest rates led to expectations of a reversal in the recently depreciating dollar."

In the near term, at least up to the Budget, the markets are likely to bounce back, with the tailwind of good news from the government, such as further reforms in banking, taxation and infrastructure sectors.

By that time, with the assembly elections in Bihar, Haryana and Jharkhand also over (the only state elections due this calendar), the government will know its support base from the state governments better as many of the imminent reforms need the utmost co-operation from states.