Weakness in the rupee once again made the equity market nervous. Participants, particularly foreign investors, will be keenly watching the currency fluctuation, as the rupee movement will have a direct impact on their fortunes.

The rupee hit near one-year low below 57 a dollar on Friday. It closed at 57.06 against the US dollar. The rupee depreciated nearly one per cent during the week and more than 5.2 per cent since the start of May.

There is general apprehension in the market that the rupee’s weakness could encourage further fund outflows, as overseas investors sold about Rs 7,600 crore from the Indian debt market in June due to weakness in the rupee. However, they remained net buyers to the tune of Rs 772.6 crore in Indian equities.

Almost for the last two years, the domestic equity market movement has been depending heavily on foreign institutional investments, even as the domestic mutual funds witnessed redemption pressure from investors. Retail participation has also been very low, thus leaving a huge space for foreign investors to anchor the market sentiment.

Fall in rupee value will make international investments less attractive.

This is because even if a foreign investment portfolio of an US investment banker generates a 10-per cent return in Indian equities, his/her profits will be nullified to zero if the rupee weakens by 10 per cent against the dollar.

On the other hand, the reverse is also true; if the Indian stocks decline or stay flat and the rupee appreciates (against the dollar) sufficiently, then it reduces the loss or enhances the returns of the foreign investor’s position.

Positive on FII flows

However, Credit Suisse believes foreign institutional flows will be stable. Taking a cue from McKinsey Global Institute study that revealed FDI flows were the least volatile of all capital flows followed by FII equity and bond flows, Credit Suisse said: “It is not hard to see why: despite near-term volatility, longer-term FII investors in India have continued to see cumulative gains.”

A weak rupee also poses problems for corporates, which raise funds through dollar-denominated bonds.

Besides the rupee movement, the following factors will also drive market sentiment:

Progress in monsoon will be keenly watched by market participants. Rains recorded were higher than the average levels in the first week of the monsoon season.

Industrial output data for April 2013 will be revealed on Wednesday.

Inflation based on the combined consumer price index for urban and rural India for May will also be announced on Wednesday, while wholesale price index inflation would be out on Friday.

All these are important as they will give some clues on what steps the RBI will take in its next week Monetary Policy meet.

The RBI Governor, in fact, said monetary actions in the coming months will be determined by the outlook on monsoon and ensuing impact on inflation.

>badrinarayanan.ks@thehindu.co.in

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