The rupee hit a new record low of 81.22 to a dollar because of a rising dollar index and higher bond yields before ending the day at 80.99, a new closing low.
Rising risk aversion after the US Federal Reserve took a tougher-than-expected stance to combat inflation whipped the stock market on Friday, driving the benchmark indices over 1.7% lower. The rupee hit a new record low of 81.22 to a dollar because of a rising dollar index and higher bond yields before ending the day at 80.99, a new closing low.
Foreign institutional investors (FIIs) continued their selling spree, with the Sensex and Nifty tumbling 1.72% and 1.70%, respectively. Experts said that investors have turned deeply risk-averse after the US Federal Reserve’s latest rate action and the stated resolve to fight inflation. The exit from equities is also hastened by the escalation in the Russia-Ukraine conflict, driving investors to safe-haven dollar assets.
Nilesh Shah, managing director of Kotak Asset Management Co., said markets would “remain volatile with a downward bias for now, amid rising escalation between Russia and Ukraine, aggressive Fed rate hikes with the terminal FFR (fed funds rate) estimated at 4.6% next year, and the fact that India trades at a 65% plus premium to EMs until recently.”
FIIs, who have been net sellers of equities worth over ₹3,800 crore in the first four days of the week, sold shares worth ₹2,900 crore on Friday. According to V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, FIIs are unlikely to buy consistently when the US 10-year bond yield is above 3.7% and the dollar index is above 111.
After shedding 302.45 points, the Nifty at 17,327.35 has slipped into the red during 2022 (from 17,354.05 closing levels on 31 December), erasing all gains for the year. NSE volumes were the lowest since 12 September, said Deepak Jasani, head of Research at HDFC Securities. All sectoral indices ended with losses, with realty, power, banks, capital goods and telecom being loss leaders.
Meanwhile, the rupee is expected to remain under pressure, and currency experts said its recent range of ₹79-80 may shift upwards given the risk-off sentiment after the US Fed meeting.
“After the FOMC (Federal Open Market Committee) meeting, a distinctly more hawkish Fed implied a strengthening dollar, and the rupee range also had to shift higher, which has been supported by RBI interventions,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.
Rakshit said the rupee might trade in the 79-83 range in the rest of FY23 on the back of dollar strength, risks for the current account deficit remaining wider than usual, and limited room for forex interventions and the RBI may let the rupee depreciate gradually to address external imbalances.
Some of the favourable factors could be lower crude, and other commodity prices and FPI debt flows in case of an announcement of bond index inclusion, he added.
K.N. Dey, managing partner, United Financial Consultants, said RBI may have intervened in the forex market as the rupee crossed 81.20 level before it pared losses to settle at a record closing low of 80.99, down 0.15%.
Fears of a nuclear conflict over Ukraine and Fed rate hike had spooked the rupee recently, Dey said, adding the US interest rate may be hiked more given the wide gap between CPI inflation and FFR in that market, with inflation ruling more than 5% above the FFR at 3-3.25%.
By contrast, in India, the spread between CPI inflation and the repo rate was 1.6%, indicating that RBI could raise the repo by 100 bps to 6.4% by year-end.
Kotak’s Shah said that the level of the rupee should be market-determined, but the extent of volatility should be determined by RBI.
He said only a sharp depreciation toward 85 could affect FPI flows adversely.
Investors may wait and watch before committing more money, Vijayakumar said, adding there is a trend of selective bottom-up stock picking.
The US Fed revising growth expectations has spooked investor sentiments, further adding to fears of recessions. Brent slipped further to $86.67 a barrel on slowdown fears.
“This time around, the Fed policy comes with a projection of lower growth and gradually rising unemployment,” said Joseph Thomas, head of research at Emkay Wealth Management. This dismayed many market participants, who believe that this is confirmation of the US gradually entering a period of declining economic growth, Thomas added.
Global stocks hit two-year lows on Friday, and bonds faced an eighth weekly loss as investors digested the prospect of a far more aggressive rise in US interest rates, Jasani said. Brent slipped further to $86.67 a barrel on slowdown fears.
