Sensex Trades Rangebound; Rupee Weakens Further

Stock markets in India are trading flat with a negative bias as investors remain cautious ahead of August F&O expiry, due later in the day today. Losses are largely seen in realty stocks and bank stocks.

The BSE Sensex is trading down by 25 points and the NSE Nifty is trading down by 12 points. Meanwhile, the BSE Mid Cap index is trading up by 0.6% while, the BSE Small Cap index is trading up by 0.4%.

Meanwhile, the Indian rupee today weakened to new all-time lows against the US dollar, tracking the losses from Asian currency market.

In the early trade, the rupee was trading at 70.68 a dollar, down from its previous close of 70.59. The currency opened at 70.69 a dollar and touched a fresh all-time low of 70.82 a dollar.

The 10-year bond yield stood at 7.929%, from its Wednesday's close of 7.918%. Bond yields and prices move in opposite directions. Bank of America in a note on Wednesday said India's sovereign bonds may be under pressure as oil hold gains near the highest level in a month.

The recent weakness in the rupee versus the US dollar indicates further trouble for the market ahead. As seen from the below chart, when the Sensex corrected to its multi-year lows in March 2009, the rupee had also weakened. Similarly, when Sensex hit an all-time high in January 2018, the rupee had been gradually strengthening over the past year. The Sensex was moderately lower in early trade today. Since January, it has gained nearly 15%. While BSE mid and Small cap indices have seen a healthy correction, large caps have remained almost intact during the same period.

Change in the Rupee and Sensex in the Past 10 Years

Post-January, the rupee has been on a constant decline versus the dollar.

So far this year, the rupee has weakened over 9%, the worst performer among Asian currencies. Reportedly, foreign investors have sold US$256.5 million and US$8 billion in equity and debt markets, respectively.

Increase in US bond yields has made it attractive for foreign investors. This has resulted in capital outflows from the Indian market. Past history has shown that any further weakening of the rupee will adversely impact the market.

But for investors, is it a matter of concern? If you have a horizon of 10 or more years, it shouldn't. As we can see from the chart, despite the rupee weakening by over 60% in the past decade, Sensex has also been up in the same period.

In another development, the Reserve Bank of India (RBI) in its annual report said that, with pick up in industrial activity and good monsoon, it expects India's gross domestic product (GDP) growth rate to accelerate to 7.4% in the current financial year from 6.7% in the previous year, with risks evenly balanced.

RBI also said that its monetary policy will continue to be guided by the objective of achieving the medium-term target for retail inflation of 4%, within a tolerance band of +/- 2%, while supporting growth.

However, it cautioned that the country's external sector will have to confront global headwinds, but expressed confidence that the Current Account Deficit would largely be financed by foreign direct investment.

Further, the RBI noted that agricultural production is likely to remain strong, growth impulses in industry are strengthening, corporates are reporting robust sales growth and improvement in profitability, and services sector activity is also set to gather pace.

The central bank further said the up-tick in credit growth is likely to be supported by the progress being made under the aegis of the Insolvency and Bankruptcy Code (IBC) in addressing stress on balance sheets of both corporates and banks, recapitalisation of state-owned banks, and a positive outlook on the economy.

The prevailing negative credit-to-GDP gap indicates that there is sufficient scope for credit absorption and expansion in bank lending on a sustained basis.

On the inflation front, RBI said it is likely to face upside risks over the rest of the year from a number of sources, warranting continuous vigil and a readiness to head off those pressures from getting generalized.

Rising global commodity prices, especially of crude oil, and recent global financial market developments are firming up input cost pressures. The RBI has cautioned that global headwinds are likely to confront India's external sector in 2018-19.

Even though exports have gathered momentum in Q1FY19, the worsening global trade environment as a result of protectionist policies may impinge upon external demand. Elevated crude oil prices and the strengthening of domestic demand may push up the import bill.