Indian stocks will be swayed by foreign portfolio flows and the movement of the rupee in the week ahead. If foreign institutional investors (FIIs) continue to sell Indian stocks as they have done in the past 10 trading days, stocks and the rupee are likely to drift lower as investors worry about the impact of the weakening Indian currency on the country's widening current account deficit (CAD). The government will release the January-March quarter CAD this week.
However, few in the market are focused on the CAD numbers, as foreign institutional outflows are considered a bigger risk for Indian markets in the near term. FIIs have net-sold shares worth Rs 7,979 crore in the past 10 days after pumping in close to Rs 84,000 crore from January to early June. Although purchases by their domestic counterparts, which have net-bought to the tune of Rs 6,544 crore, have cushioned the impact of the FII selling, market participants fear these institutions could run out of firepower soon if the outflows continue.
Markets are reacting to the liquidity flows from foreign players and not the macro-economic fundamentals. So, markets are going to be negative even if CAD is in line with expectations, said Sudhakar Ramasubramanian, managing director of Aditya Birla Money. The CAD is expected to be around five per cent of gross domestic product for FY13. CAD touched an all-time high of 6.7 per cent of GDP in the October-December 2012 quarter.
FIIs are selling as the US Fed has said it would start rolling back its stimulus programme, known as quantitative easing (QE3), by the end of 2013. Benchmark indices fell roughly 2 per cent last week.
The depreciation in the rupee would bode well for export-oriented stocks in the IT and pharmaceuticals sector, according to analysts. This week, the June series futures and options will expire, which will heighten volatility.
Technical analysts said that markets are prone to sudden movements in the absence of key support-levels. The Nifty is currently trading below the 200-day moving average of 5,792. They said that the market was not yet in the over-sold zone and could experience some sharp corrections through the week.
"In the absence of a good support level, we could see the Nifty touching previous lows of 5,480-5,500 in the week ahead which was last seen in April this year," said Alex Mathew, head of research at Geojit BNP Paribas Financial Services. The Nifty closed at 5,667 on Friday, while the Sensex ended the volatile week at 18,774.
The undertone in the equity market, however, is of uncertainty with divergent views emerging on the rupee movement. "While some quarters believe the rupee will come down to Rs 56-57 against the US dollar, there are others who believe that it will have to go to Rs 60-61 from current levels. FII outflows will cease to be a worry only if the rupee stabilises at current levels and appreciates a little," said Ramasubramanian.
"There is a movement of flows away from the emerging markets back to the developed market. But this money is being parked in money-market funds and will find its way back into our market once they see some stability in the rupee," said S Krishna Kumar, head of equity at Sundaram Mutual Fund.
