Will a depreciating rupee make Nifty bitter for D-St bulls? What insiders say

NEW DELHI: As the US Fed turned the screws with an outsized 75 bps rate hike for the third time in a row, foreign institutional investors (FIIs) withdrew Rs 2,500 crore from Dalal Street. Putting more pressure on Nifty, analysts said, the FII selloff may get worse in the coming days as the domestic equity market is now turning less attractive for foreign investors in the short term.

“If we start seeing INR depreciating, then from a USD returns perspective for FPIs, India becomes unattractive. We could also witness a reversal of FPI flows in the near to medium term, which will increase market volatility,” Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS, said.

Higher interest rates in the US will force major central banks, including India, to increase interest rates to stem the pressure on their domestic currencies and with increased interest rates and cost of capital, market multiples can contract, he said.

The Indian rupee, which plunged 83 paise on Thursday, slipped below the 81 mark and depreciated 44 paise on Friday to hit fresh all-time low of 81.23.

After having invested over Rs 51,000 crore in August, the pace of FII inflows has already slowed down with net buying of less than Rs 11,000 crore so far in the month. Retail and other domestic investors have also shown reluctance to keep flooding the market with ample liquidity.

Fed chair Jerome Powell, who sounded more hawkish than anticipated, has increased the interest rate forecast to 4.4% by the end of 2022. The indication is that 125 bps more rate hikes can be expected in the remaining two policy meetings scheduled this year.

“The rising of rates will put pressure on the RBI to react as well to protect the INR and avoid financial stress. In such a scenario, it is wise to avoid cash-burning businesses and businesses that have too high debt,” said Sonam Srivastava, smallcase manager & Founder, Wright Research.

Analysts say the rupee will stay under pressure till the RBI takes action.

Another pain point for the rupee could be the escalation of stress between Russia and Ukraine. In case the energy cost goes higher, the rupee may continue to slide.

“We may see some correction in the US dollar once the central bank acknowledges improvement in the inflation situation. Another challenge for the US dollar could be aggressive tightening by other central banks to control inflation as well as possible central bank interventions to support their currencies,” said Ravindra Rao, VP- Head Commodity Research at Kotak Securities.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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