Flight to dollar overwhelms crude comfort

The biggest worry for India and its equity markets is the strengthening dollar, while its biggest relief is falling crude.

On Thursday, both hypotheses were in simultaneous play, but it’s the greenback’s rise that caused a massive overhang.
“The Federal Reserve’s statement on Wednesday, offering a subdued outlook on the US economy, has only made dollar stronger, leading to the selloff in global equities,” said VK Sharma, head of private broking and wealth management at HDFC Securities.

“Investors will have a tough time in the coming months. Though the Reserve Bank of India seems near the end of its rate tightening cycle, things could turn problematic if the government does not address the fiscal situation. As India is net importer, the depreciation in the rupee would only add to inflationary pressures. Also cost of renewing external debt would become higher,” said Sharma.

On the flip side, a falling rupee helps exporters such as software, apparel, engineering and handicraft firms.

The high demand for dollars - spurred by panic sales by foreign investors — led to the dollar index inching up higher by 1.37% on Thursday to around 78.39.

The rupee on the other hand plunged 2.5% to close at a 28-month low of 49.54 per dollar.

Hot money is exiting from emerging market assets, said a fund manager.Thursday’s resultant carnage leaves the Street on on a very weak wicket technically.

“There was significant put unwinding at Nifty 5000 and 5100 levels and some amount of call writing at 5100 levels. Also there was huge demand for dollars from foreign investors which made it clear that they were intending to liquidate their positions,” said Karun Mutha, head of derivatives at HSBC Invest Securities.

The India VIX, the local fear gauge, rose sharply from 27% levels to 34% on Thursday.

Going ahead, participants expect the markets to take cues from global events with no positive triggers in sight domestically.
However the markets may find some respite this month as experts see strong support levels at around 4800 levels.

“We don’t expect significant downside below 4800 levels till expiry of the September contracts. Though implied volatilities for ‘at the money’ options have jumped to around 31%, there is strong support build-up seen at 4800-4900 levels,” said Siddarth Bhamre, head of derivatives at Angel Broking.

As for the rupee, it is weakening because there is genuine demand for dollars from importers, said experts.

“If the RBI had intervened, then currency would have got short-term support. But it hasn’t. We expect the demand for dollars to stay high, so the outlook for rupee would remain bearish,” said a forex dealer at a state-owned bank.