Of Mutual Funds Offloading Small Caps, Depreciating Rupee And Key Stocks In Action Today

There is an interesting dichotomy in the Indian markets these days.

On one hand the BSE Sensex is touching life time highs. And on the other, there is no respite for the stocks in the small cap space. The BSE Smallcap index is down 13% year to date. Sensex is up by 12% during the same period.

A slew of auditors' resignations, coupled with mutual funds shifting their asset allocation towards largecaps and surveillance measures by the regulator have led to sharp correction in the stocks in the smallcap universe.

In the quarter ended June 2018, mutual fund ownership in large-caps rose 1.2% from the levels they held in the September 2017 quarter. Further, general elections are due next year. As smallcaps tend to be more volatile during such period, funds are reducing their risk exposure by buying more large-caps.

Talking about mutual funds, inflows into equity mutual fund schemes are showing signs of a slowdown. Inflow into equity mutual funds declined 2.2% to Rs 9,452 crore in July compared with Rs 9,660 crore in June, according to data released by the Association of Mutual Funds in India.

The strong domestic flows are the reason behind the buoyancy in the indices since the preceding two years. A slowdown in the domestic flows could adversely impact the index going forward.

Rupee Breaching 70 Mark on Trade Deficit Fears

The rupee breached the 70/ dollar mark as trades continued to short-sell the currency over concerns about India's worsening trade data.

The depreciation may continue given the fact that India has to repay a huge sum of external debt in the coming years. India's external debt stands at US$ 513 billion and almost half of the same has to be repaid in the next year. Our foreign exchange reserves are not sufficient to repay the debt and this may put pressure on the rupee. Further, a rise in the bond yields in the US may also led to the strengthening of the dollar against the rupee.

As most of the IT services are exported, a depreciation in rupee bodes down well for the financials of IT companies. Further, a rupee depreciation may also be beneficial for the pharmaceutical industry.

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Disclosure: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. ...

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