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    Rising dollar index may have a silver lining for India; Value of greenback hits a 4-year high

    Synopsis

    The dollar index — or value of the US dollar against a basket of 10 international currencies — hit a 4-year high of over 85 last week and has consistently stayed above it.

    ET Bureau
    The expectations of an increase in interest rate have added muscle to the US dollar, and some experts feel that it could move even higher in coming months. On the other hand, India has started seeing a steady exit of FII money in the past 10 trading sessions, and consequent weakness in the equities market.

    Investors fear that a rise of the dollar could upset the rhythm of the Indian equities, which are in the middle of a bull run. However, the fears appear misplaced, with empirical evidence suggesting that improvement in the world's largest economy usually brings cheer to emerging market economies.

    The dollar index — or value of the US dollar against a basket of 10 international currencies — hit a 4-year high of over 85 last week and has consistently stayed above it. In India, foreign institutional investors (FIIs) turned net sellers in the last few days, selling equities worth Rs 3,000 crore in the past nine trading sessions, which caused Nifty to lose 1.9% in the process while the rupee weakened 1.1% to Rs 61.61 against the dollar.

    However, experts are not ready to link the two events. “The recent correction is mainly due to the markets going into overbought zone and events such as the recent Supreme Court verdict on coal mines,” said Kunj Bansal, ED & CIO, Centrum Capital.

    The very low level of volatility index, or India VIX, indicates that markets had turned complacent, said Gaurav Mehta, equity strategist, Ambit Capital. “This means even a small negative news can trigger a bigger correction,” he explained.

    “Similarly, the derivatives positions built by FIIs indicate complacency, with a very low level of net outstanding put options. Hence, we believe the correction would continue for the next 1-2 months, but the medium to longterm view remains bullish on Indian markets.”

    The strength of the dollar index is a coincidental development, but not the main cause for a dip in Indian equities. “The recent strength in the dollar index is primarily due to continuing monetary easing in Europe and Japan, while the US is expected to tighten the monetary stance,” explained Ambit’s Mehta.

    In fact, there’s a good reason to believe that the dollar strength is good news for India in the medium to long term. “A stronger dollar will be positive for export-oriented sectors and ease commodity prices that will ease the domestic inflation pressure,” said Centrum’s Bansal.

    “Interest rates going up in the US is a sign of economic strength, which is actually good for the emerging market economies,” said Nandkumar Surti, MD & CEO, JP Morgan Asset Management company. “Empirical research suggests that until the US interest rates reach 6%, its correlation with emerging market equities remains positive. Also, the US-based financial institutions have parked a large chunk of the monetary stimulus with the US Fed itself, which means rising interest rates will have minimal impact on the global liquidity,” he added.

    In short, investors needn’t panic about the dollar gaining strength, as the performance of the domestic market will depend on factors like economic growth and corporate earnings, which are expected to do well in the medium to long term. In the meanwhile, as the correction sets in, stocks with weaker fundamentals will take a bigger hit than the rest.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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