Market recovery hinges on rupee's strength

The renewed strength in Indian stocks could be put to test in the days ahead as uncertainty about the rupee's prospects remain and the economic data points to a protracted downturn. US Federal Reserve Chairman Ben Bernanke's comments last week that the central bank might not roll back the stimulus package soon assuaged investor concerns over sharp foreign portfolio outflows temporarily, but market participants said further weakness in the rupee could dampen sentiment again. First quarter earnings of top companies, including Reliance Industries, HDFC Bank, and Bajaj Auto, will be keenly watched by investors.

Foreign institutional investor (FII) outflows have slowed down to Rs 290 crore in July so far after they sold in June - the first month of FII selling in 2013 so far - of Rs 10,500 crore. Optimists are hoping Bernanke's remarks would result in resumption of FII inflows, but a weaker rupee could play spoilsport. "We are driven by where the currency is headed at this point; whether it moves to 62 and beyond (against the dollar) or stabilises below 60 and lower," said Sadanand Shetty, vice-president and senior fund manager - equity at Taurus Mutual Fund. "If oil appreciates further from these levels, the rupee would likely fall further."

A fall in the rupee would make imports costlier for India, further weighing down the rupee. Fund managers said the lower-than-expected May industrial production and June consumer inflation data, which were announced after trading hours on Friday, are likely to keep investors worried about the economy's prospects. "While the rupee still remains a big concern at this point, the IIP (Index of Industrial Production) and CPI (consumer price index) data have been disappointing. So, in the short-term, the market is expected to react negatively to this data," said S Krishna Kumar, head of equities at Sundaram Mutual. The government released the May industrial production data, which came in at -1.6 per cent, after market hours on Friday. Core inflation for June stood at 9.87 per cent, higher than the 9.39 per cent figures seen in May. The wholesale price inflation numbers will be released on Monday. Technical analysts said the Nifty could advance by about four to five per cent if the index manages to stay above a key support of 5,890. The NSE Nifty closed at 6,009 on Friday.

"If the Nifty is able to hold the 5,890-levels on the lower side, it could be seen touching 6,229-levels by (futures and options) settlement towards the end of this month," said A K Prabhakar, senior vice-president, Anand Rathi Financial Services.