Correlating the ups and down in the Indian rupee with the stock market, Vijay Bhambwani, CEO, bsplindia.com, suggests that if the rupee continues with its downward fall, the Indian stock market may fall breach October lows and fall further. “If the rupee falls below the 53.0-53.50 mark vis-a-vis the USD, expect a mini meltdown atleast in the equity markets. In that case, the 2250 level (on Nifty) will be breached easily to form a new low. The possibility of that low being below the 2000 levels on the Nifty spot is fairly high,” he says.
Bhambwani supports his outlook by comparing the value of rupee at the time of October lows. “The October 2008 lows were made with the INR at 51.20 - 51.40 band. The rupee has breached the 52 level since then. Clearly the nation’s ‘share price’ (currency) indicates weakness. The curency market is a far more accurate barometer of the nation’s health compared to the equity indices. Whether you like it or not, we are under siege. Had it not been March (NAV time), the indices would have been much lower to reflect a truer picture than it shows now,” Bhambwani said.
He lists various factors that could lead to further fall in the Indian rupee and subsequent impact on the stock market. “Should oil prices rally and the Rupee weaken (as it will), expect the landed prices of fossil fuels to hit us with a double whammy. Even if crude declines but the rupee weakens, the landed cost remains high. If the government resorts to usual stunts like duty / excise cuts etc etc, the fiscal deficit balloons. The rupee falls even further. A falling rupee means a de-rating by Moody’s, Fitch and S&P.
Consequently, the foreign borrowings are at higher interest rates. Corporate profitability is lower and stock prices fall. Falling rupee means FIIs exit domestic equity investments due to treasury considerations and may want to enter same stocks at lower levels. But their exit will lead to sharp declines in the rupee, causing fresh declines in return. It's a vicious circle. Rising commodity prices are likely to be another thorn in the flesh of the corporates as raw material costs zoom higher. Monitor this market keenly after the forex market.
Most experts have failed to take this consideration into their calculations when they are putting forth their projections. This year’s elections are likely to be a major drain on the exchequer and the real costs to the public will be high. Whichever party forms the government, managing finances will be a tight rope in an optimistic scenario and death by hanging in case the finances are mis-managed. The fiscal deficit going past the 7-7.50 per cent of GDP will be viewed poorly by global lenders / investors. Taking a half hearted view on the market signals is likely to cause incorrect readings in the markets. Only a balanced approach will yield superior results. We suggest our investors keep their ears to the ground to monitor the market more efficiently,” he advised.