Seesawing To The Rupee

The rupee hit a record low yesterday, spurting a new wave of concern domestically. Worries around the country’s current account deficit and policy towards revival of the economy escalated as the rupee depreciated against the dollar. This has also made the street to think of the RBI’s approach in its policy review on June 17, 2013 to be more cautious.

While foreign fund outflows, macroeconomic data points and central bank policy remain a worry, the prospects of easing of foreign investment norms, intervention and other currency boosting measures increase. This has caused a rather mixed reaction on equities with the market movement seesawing in a rather volatile manner.

The downfall in the rupee has also caused a lot of sector specific action resulting in a rather cumulative effect on the markets. While a depreciating rupee benefits the export-oriented sectors of IT and pharma, it takes a toll on the power sector which has to depend on imports of coal.

Overall, the effect has been high amounts of volatility with drastic swings in direction. This trend is expected to continue today as well.

To add to the uncertainty, and downward pressure are global cues.

In the US, Standard & Poor’s revised its credit rating outlook for the US to stable from negative. At the same time, St Louis Federal Reserve President James Bullard said that improved employment data suggested the Fed could taper down its bond purchases. Lately, the US markets have become excessively sensitive to comments surrounding the USD 85 billion a month bond-buying programme.

Data from China indicated inflation growing at a slower-than-expected pace in May 2013 and an unexpected slump in export growth. Moreover, there is high amount of volatility in Asian markets as investors have turned cautious before the Bank of Japan’s policy meeting scheduled to conclude later today.

Domestic factors have been causing volatility and to add to the uncertain nature of the markets are international cues. We expect these factors to result in a volatile trading session with a downward bias for today.