Despite festive cheer, stocks, rupee may fall further on rising crude, US rates

Despite festive cheer, stocks, rupee may fall further on rising crude, US rates

According to a poll of 27 money managers, a majority (55%) believe the stock market is likely to head south by another 5-6% before Diwali, which falls in the first week of November.

The coming festive season is unlikely to uplift the mood of the markets, currently buffeted by several headwinds. The rupee has depreciated over 13% against the dollar so far this year while the Sensex has plunged 11.5% from its peak in late August and weak global cues aren't helping.

So the market consensus seems to be that things could get a lot worse before they start getting better. According to a poll of 27 money managers and heads of research conducted by The Economic Times, a majority (55%) believe the stock market is likely to head south by another 5-6% before Diwali, which falls in the first week of November.

While 20% of the respondents expect the fall to be muted at 2% or less, an equal number think it could be sharper at 8-10%, effectively taking the market into bear territory.

Stock indices ended at a six-month low on Friday - while the Nifty ended 2.7% lower at 10,316.45 points, wiping out all gains made this year, the BSE Sensex lost a whopping 1,850.15 points over the week to close at 34,376.99 points. And as expected, both benchmark indices posted a negative opening today. Sensex is currently down 0.82%.  

The poll further indicates that a majority don't see the tide turning for the markets even after Diwali. While 35% of those surveyed expect the Nifty at 9,500-9,900 points by December 31, 24% see it at 10,000. Of course there are optimists too - 29% see the Nifty at 11,000 by year-end.

Nonetheless, the market mood suggests that the record-setting sprees are unlikely to be back any time soon, especially given the sustained selling by overseas investors.

Foreign portfolio investors (FPIs) withdrew a net sum of Rs 7,094 crore from equities during October 1-5, and Rs 2,261 crore from the debt market, taking the total to Rs 9,355 crore. The latest withdrawal follows a net outflow of over Rs 21,000 crore from the capital markets in September.

The RBI's decision to keep the repo rate unchanged last week seems to have fanned uncertainties further. The rupee, which had closed at a record 73.77 to the dollar on Friday, after breaching the 74 mark intraday, opened even lower at 73.96 today.

"When all the other emerging markets have been hiking rates to reduce the interest rate differential with the US economy, RBI chose to maintain status quo in policy repo rate as against the consensus expected hike of at least 25 bps (basis points)," Ravi Muthukrishnan, head of institutional research at Elara Securities, told the daily.

"Besides crude prices and rupee depreciation, hike in interest rates. State elections in India pose downside risks to the market in the coming weeks and months." State elections in five states will take centre-stage in the last two months of the current fiscal followed by the general elections in April or May.

Significantly, RBI Governor Urjit Patel said that the rupee's fall "is moderate in comparison to several other emerging market peers" post the MPC meeting, and that the RBI does not have a target for the exchange rate. This means that the equity markets will now focus on how much further the currency could drop.

"With Iran sanctions supposedly beginning in November, the period in between will be crucial for the Indian financial markets," State Bank of India chief economic adviser Soumya Kanti Ghosh told the daily. "The rupee's value will be determined by the crude oil price movement and US treasury rates."

A poll of 22 market participants conducted by the daily after the MPC's decision reveals that many expect the rupee to slide to 75 or even 77 against the dollar by March 2019. Meanwhile, Indian bond yields look set to harden further as robust growth propels US interest rates to their highest in seven years and crude surges the most since 2014.

It has reportedly already gained 26% this year, although Brent futures have retreated slightly in the past three trading sessions on the latest buzz from Saudi Arabia. According to Bloomberg, the kingdom's crown prince said they can tap their spare production capacity immediately to offset any declines in Iranian crude exports after the US sanctions kick-in.

India will be watching this development with bated breath since we are not only the world's third-biggest oil importer, but also rely heavily on imports to meet domestic demand for the same.

"Three big issues have affected Indian markets. Of this, worries around NBFCs (non-banking finance companies) seem manageable and will taper off soon (and) oil prices are close to peaking," Manish Gunwani, CIO (equities) at Reliance Nippon AMC, told the daily.

"However, US economic data continues to be strong, which needs to be watched for the next two-three quarters." That could increase the exit of overseas money. Meanwhile, given all the uncertainties, investor sentiment seems to be leaning towards the defensive. According to the ET poll, 24% see IT as a strong sector and 22% said the same for the pharma sector.

With PTI inputs