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nifty: Will a depreciating rupee make Nifty bitter for D-St bulls? What insiders say

NEW DELHI: Foreign Institutional Investors (FIIs) withdrew Rs 2,500 crore from Dalal Street as the US Federal Reserve turned the tide with an outrageous 75 basis point rate hike for the third straight month. According to analysts, the FII sell-off in Nifty could continue to suffer and worsen in the coming days as the domestic stock market now becomes less attractive to foreign investors in the near-term.

“If we see INR depreciating, India will become unattractive from a USD yield perspective for FPIs. We could also see a reversal in FPI flows in the short to medium term, which will increase market volatility,” said Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS.

Higher interest rates in the US will force major central banks, including India, to hike rates to stem pressure on their domestic currencies, and as interest rates and the cost of capital rise, market multiples may shrink, he said.

The Indian rupee, which fell 83 paises on Thursday, slipped below the 81 mark and fell 44 paises on Friday to hit a new all-time low of 81.23.

Having invested over Rs.51,000 in August, the pace of FII inflows has already slowed, with net purchases of less than Rs.11,000 a month so far. Retail and other domestic investors have also shown reluctance to continue flooding the market with ample liquidity.

Fed Chair Jerome Powell, sounding more hawkish than expected, has raised the rate forecast to 4.4% by the end of 2022. The indication is that another 125 basis points of interest rate hikes can be expected in the remaining two monetary policy meetings this year.

“The rise in interest rates will put pressure on the RBI to react as well in order to protect the INR and avoid financial strains. In such a scenario, it is prudent to avoid money-burning companies and companies with excessive leverage,” said Sonam Srivastava, small case manager and founder of Wright Research.

Analysts say the rupee will remain under pressure until the RBI takes action.

Another pain point for the rupee could be escalating tensions between Russia and Ukraine. If energy costs rise, the rupee could slide further.

“We could see some correction in the US dollar once the central bank acknowledges an improvement in the inflation situation. Another challenge for the US dollar could be aggressive tightening by other central banks to control inflation, as well as possible central bank interventions to support their currencies,” said Ravindra Rao, VP Head Commodity Research at Kotak Securities.

(Disclaimer: Experts’ recommendations, suggestions, views and opinions are their own. These do not represent the views of Economic Times)

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Russell Falcon

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