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Indian markets may continue to wilt under heavy selling pressure as investor sentiment has turned negative but once rupee stabilises the markets are likely to see some recovery, says a Bank of America Merrill Lynch report.
The Indian stock market had its third largest single day fall in four years, declining 4% on Friday and the woes continued on Monday as well when the BSE Sensex fell 291 points to over 4-month low and NSE Nifty fell 93 points to end at the lowest level in 11 months.
The rupee today breached the 64-mark against dollar on persistent dollar demand.
But market experts still do not consider this as a buying opportunity as they believe that it is better to wait for a further correction or some signs of stability in the currency before buying into India.
"The single biggest factor making investors nervous on India is the currency. A stabilisation of the currency would make us as well as investors more positive on India," said DSP Merrill Lynch (India) Research Analyst Jyotivardhan Jaipuria.
Jaipuria further said, "While the government has taken a series of steps to stabilise the currency, it has not worked partly due to nervousness on the Fed tapering."
Despite RBI and government taking measures to stabilise rupee, Indian markets have not had any significant improvement.
The BofA-ML report further said the sentiments of investors on India have turned negative and they are concerned over the risk of the "policy mistake" in their efforts to curb the currency volatility.
According to the latest fund managers survey by BofA-ML the Indian markets are now less preferred than what they were three months back.
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The report further noted that despite the bearishness of foreign investors over the past few quarters, FII ownership of Indian markets was at a 8-year high as on June-end.
"Any policy mistake could likely result in accelerated selling by the FIIs which could bring down the markets rapidly," it said.
The report further noted that markets recover once rupee stabilises. Historically, once rupee depreciation stopped, markets had given a positive return in the short term.
