Sensex hits life-time high; rupee remains under pressure
Rupee is likely to trade weaker towards the 72.50/73 levels if the sentiments do not improve.
The Indian rupee is set for further losses on the back of escalating public debt and the worsening credit crunch, amid forecasts that Asia's third largest economy would slide to a six-year low, even as stock markets show record buoyancy.
The rupee slumped to 72.2425 per dollar earlier this month, almost as close to a nine-month low of 72.4075 set in September.
"The Indian rupee continues to trade weaker on the back of lower economic growth forecasts combined and escalating levels of public debt and a credit crunch among non-bank finance companies. Moody's Investors Service cut the country's credit rating outlook to negative this month and the general perception is that economic slowdown is likely to be deeper and longer than it anticipated," said Pradeep Unni, head of Strategic Business Development, Richcomm Global Services DMCC.
"This has caused the slow reversal in the currency pair. Rupee is likely to trade weaker towards the 72.50/73 levels if the sentiments do not improve. Unless the government do not take major policy changes, rupee's outlook is bleak. It is ideal to hedge the currency pair on regulated exchanges like Dubai Gold & Commodities Exchange (DGCX) to take protect from adverse price move," said Unni.
"On the contrary it's quite strange to see that the stock markets are performing remarkably well on the back of better valuations and increase in the domestic and foreign investments. Investments to the stock markets via SIP (Systematic Investment Plan) has seen a tremendous surge on the general outlook for higher valuations," said Unni.
He said that positive US-China vibes has been fresh momentum to the uptrend. "Overall good rainfall in most part of India, recovery in telecom, banking and energy sector are giving additional push to north. Farmers are likely to harvest good crop this year and thus boosting the rural and associated sector."
Analysts said that a breach of support around those levels may see it weaken toward 73.0217, the 76.4 per cent retracement of its rally from October 2018 to July 2019.
JPMorgan Chase & Co expects the currency to plunge to levels hit last October, while Nomura forecasts the currency to finish 2019 at 72.5 per dollar.
Analysts said a sustained inflow of foreign funds and easing US-China trade tension led the Sensex to close at a record high level on Monday. Of the Nifty50 stocks, 44 ended higher while 7 declined.
The Sensex closed 529.82 points, or 1.34 per cent higher, at 40,889.23 before hitting an all-time high of 40,931.71. The broader Nifty advanced by 164.60 points to 12,079.
Sajith Kumar P.K, CEO & managing director at IBMC Financial Professionals Group, said that within a short time, BSE would be able to reach new heights with the support of foreign portfolio investors. "The report that US-China may end up their current trade issues by end of this year created positive momentum for global markets and the dollar. The continuous investments from FPI and domestic institutional investors are spurring this surge," said Kumar.
The biggest risk emerging for India at this juncture is growth weakness," said Indranil Pan, chief economist at IDFC First Bank in Mumbai. "That, along with fiscal risks, will probably cause the rupee to weaken. The poor growth conditions may lead to lower capital flows and hence could be a significant negative for the currency."
"Cues that US and China will conclude a deal by next month lifted the sentiment across the globe. Reconstruction of Sensex indices and new developments over divestment to curb the fiscal deficit provided confidence in Indian market," said Vinod Nair, head of Research at Geojit Financial Services.
India's massive domestic market is now dragging on the rupee as growth at home slows, foreigners pull cash from local equities and the currency increasingly tracks moves in the yuan as the trade war heats up.
"Even though India is directly less vulnerable to US-China tensions, it can't remain completely insulated to the wider risk aversion," said Dushyant Padmanabhan, a forex strategist at Nomura Holdings in Singapore. The economic slowdown and capital outflows don't bode well for the rupee, he said.
Analysts said that the rupee, which has slumped almost five per cent from this year's high in July, is also under selling pressure due to escalating levels of public debt and a credit crunch among non-bank finance companies, known as shadow banks. Moody's Investors Service cut the country's credit rating outlook to negative this month, saying the economic slowdown was deeper and longer than it anticipated.
India's gross domestic product probably slowed to 4.6 per cent last quarter, which would be the least since the first three months of 2013, according to the median estimate in a Bloomberg survey before the data is released Friday. State Bank of India, the country's largest lender, predicts growth will slide to 4.2 per cent, a record low in data starting in 2012.
The Reserve Bank of India (RBI) has added to the rupee's downdraft by cutting its benchmark repurchase rate by a combined 135 basis points starting in February. That has pushed down bond yields and sapped foreign demand for the nation's debt. At the same time, the RBI has boosted dollar purchases to increase rupee liquidity in the financial system, as shown by foreign-exchange reserves climbing to a record $448 billion.
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