Dalal Street pins hopes on rupee's strength

The rupee's near-term direction against the dollar will decide whether the stock markets would sustain their new-found resilience in the week ahead.

While many in the market remain wary about the prospects of the Indian currency and stocks, in the absence of crucial moves to reduce the country's current account deficit, some are betting the rebound is here to stay for a while, as the markets had been in an oversold zone.

Last week, the rupee, which slumped to an all-time low of 65.56 a dollar in intra-day trading, shed 2.7 per cent; the BSE Sensex fell about five per cent. The losses in the currency and the benchmark stock index would have been steeper but for the rebound later during the week. The turmoil in the markets prompted the finance minister to meet foreign institutional investors (FIIs) on Saturday to alleviate their concerns about the Indian economy.

CURRENCY WOES

67-70 a $: Macquarie’s estimated level for rupee over three months
51.1 a $: Rupee’s fair value according to BofA-ML
60 a $: CRISIL’s projected level for rupee by March 2014
61 a $: Rupee according to Barclays in 6-12 months
>70 a $: Credit Agricole sees no value in rupee below 70 a dollar

Currency market participants do not expect the rupee to slide immediately but feel a sharp rise is unlikely because of month-end dollar demand from importers.

"The market will be stable if there is no fresh turmoil on the global front. For the rupee, I see a trading range of 62 to 64.50 a dollar," said Mecklai Financial Deputy CEO Partha Bhattacharya.

Most foreign brokers, such as Goldman Sachs, CLSA, HSBC and JPMorgan, have downgraded ratings on India due to the rupee's fall, which is feared to stoke inflation and keep interest rates higher.

"The pullback in the markets will depend on whether the rupee stabilises around these levels," said Aviva Life Insurance Chief Investment Officer Niraj Kumar. "FIIs (foreign institutional investors) can turn buyers if that happens," he said.

So far in August, FIIs have been net-sellers of shares worth Rs 3,217 crore, while their domestic counterparts have net-bought to the tune of Rs 4,232 crore. Investors fear selling by FIIs would accelerate if the US Fed rolls back its monetary stimulus package (Quantitative Easing), sooner than expected this year.

Analysts said rollout of quasi sovereign bonds by public-sector financial institutions would be a major trigger for the rupee.

Economic Affairs Secretary Arvind Mayaram, after meeting FIIs on Saturday, said these financial institutions were preparing to raise money through this route but did not specify the time period.

"We continue to believe the rupee will not settle down till RBI issues NRI or sovereign bonds to recoup forex reserves," Bank of America-Merrill Lynch India Economist Indranil Sen Gupta said in a client note. He estimates the fair value of the rupee at 51.1 a dollar, though expectations are that the Indian currency would slip to a level between 65 and 70 a dollar. On Friday, the rupee bounced back to end at 63.35 a dollar, after weakening through the week.

"The underlying sentiment in the market is one of pessimism. However, the rupee is unlikely to touch the 65 level again," said Centrum Broking Senior Vice-President Gaurav Bhandari. The week ahead will also see the fiscal deficit and GDP numbers being announced. Analysts say any negative surprises on that front have already been priced in.

"These numbers have continued to be negative and will not have a big impact on the markets. If these numbers are positive, it will be taken well by the market," said Altamount Capital Management Director Prakash Diwan, who expects a strong upside. "Markets could witness a decent pullback. The Nifty could rise to a level near 5,800 in the next couple of weeks. Fresh investments could be seen, especially in the beaten-down sectors like power and infrastructure," he said.

"We expect the momentum to continue on the back of the rupee's recovery. The Nifty could touch the 5,550-5,600 level over the next couple of trading sessions," said Ashish Chaturmohta, head of technical and derivatives analysis, Fortune Equity Brokers.

The only downside to the positive momentum could be the F&O segment expiry on Thursday. "The Nifty will continue to move up and touch the 5,600 level till the F&O expiry date. Markets are very volatile and this volatility is expected to cause some profit-booking on the day of the expiry," he said.