Rupee, key economic data might dictate market moves

Dalal Street will focus on the direction of the Indian currency, which is closing in on the record lows hit in June 2012

The rupee’s moves vis-a-vis the dollar and key domestic economic data will set the tone for Indian stocks in the week ahead. With the weaker rupee resulting in a decline in foreign institutional investor (FII) inflows last week, the focus of Dalal Street will be on the direction of the Indian currency, which is closing in on the record lows hit in June 2012. Investors will also closely watch the April industrial production data and May inflation reading ahead of the Reserve Bank of India’s policy review on June 17.

The weaker unemployment data, which led to a 200-point gain in the Dow Jones index on Friday on hopes of a delay in the monetary policy tightening by the US Federal Reserve, may not trigger a reversal in the dollar’s recent strength, analysts said. The US currency, which weakened soon after jobs data on Friday, strengthened by the day’s end, suggesting investors still expect the Fed to reduce its monetary stimulus programme.

At home, such expectations have resulted in FII inflows slowing down in June. FIIs have been net buyers at Rs 117 crore in June so far after pumping close to Rs 82,000 crore since January. Of the five trading sessions until June 6, FIIs were net sellers in two and net buyers in three. Brokers said many FIIs are delaying purchases of Indian stocks as the market is abuzz with speculation that the rupee would weaken further to 59 or 60 against the dollar. A weaker rupee erodes the value of FIIs’ Indian shareholdings. But these investors are unlikely to trim their Indian portfolio in a hurry, said analysts.  “FIIs are perennially tied to this country,” said G Chokkalingam, ED & CIO, Centrum Wealth Management. “For those FIIs who have invested close to $40-50 billion since January 2012, an exit at this point could mean a cumulative loss of 15-20 per cent on investments because of the fall in the rupee. For those who invested before 2012, the loss is even more, at about 40-45 per cent,” he said. Still, a sharp drop in

FII inflows can hurt Indian equities because domestic investors, especially institutions, have been selling.

The Nifty has fallen 1.8 per cent in the last week. At the same time, the rupee has corrected by a per cent.

Among key economic data releases this week, industrial production for April and consumer price inflation (CPI) for May are scheduled for Wednesday, while wholesale price inflation (WPI) for May will be out on Friday.

“These will be the key parameters that RBI will consider before deciding on further easing in the monetay policy,” said V Balasubramanian, vice president and fund manager, IDBI Asset Management. “Markets will move up in anticipation of a rate cut, if these numbers show improvement.”

According to Balasubramanian, the Nifty could find key support at 5,850-levels. The index closed at 5,881 on Friday. “Market trading will be range-bound and move in the 5,850-6,050 range. There is no power for it to go below the 5,850-levels unless there is a gap-down opening.”