Friday, November 23
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Tuesday, November 20
Market expected to correct by 1000pts this week
Ironical indicators pave way for correction of 800-1000 points
An ironical relationship is being witnessed in past couple of months between exchange rate and Indian market. India, typically being an export oriented economy loses its fundamental sheen on depreciation of dollar against rupee. However on the contrary foreign funds see an additional incentive in form of currency gain by investing in India and this increased interest helps market buoyancy. In effect weakening fundamentals and rising stock markets indicate an ironical picture.
Since such mismatch is difficult to continue as a long term trend in any economic market place, the adjustment has started being witnessed over last week and effect is largely visible from Monday’s market as well. We expect a further 4-5 % correction in the market i.e. 800-1000 point correction on the Sensex, depicting the broader stock market, till the market support levels come in play and value buying start playing its role.
During this calendar year, US dollar has depreciated about 10% against rupee and we have seen huge FII inflows in our markets. In addition to the growth story sold by Indian markets, this dollar depreciation has also helped in bringing foreign funds in the country. Since, handsome currency gain is a strong additional incentive for the foreign investors over and above the market growth, an increased interest amongst the foreign investors in the Indian markets seems obvious. Increased quantum of foreign flows leads to a further depreciation of US dollar against Indian rupee and vice-versa creating a vicious circle.
There have been large talks about the quantum of foreign funds finding there way in Indian stock markets and consequent depreciation of US dollar against rupee. However, investors are seeking strong fundamental story of Indian economy which is being adversely affected by depreciating dollar. India remains largely an export oriented country, as many sectors (including index heavy weights as well) largely depend on international markets, where US dollar being largely used as the trading currency.
Dollar depreciation has distorted there fundamentals especially in a competing global place. IT/ITES, textiles, auto and ancillary, engineering are the worst effected sectors. Apart from having large market capitalization, these sectors are also among the largest employers in the country. Thus, weakening business models of these sectors also have a large influence on domestic consumption and larger economy as well.
It is also to be recognized that there are other sectors which also contribute in a major way to the market capitalization, being oil & gas, telecom, banking, infrastructure being the dominant ones. However, one needs to appreciate that in the current rally these counters have witnessed huge surge stretching their valuations and normal correction seems to be inevitable.
In our view, we have reached a situation where dollar effect on export oriented industries has started unearthening and US dollar has stabilized in a range, markets are set to correct by about 4-5 % until the value investors comes in play. The signals are strong and clear - last week, US dollar oscillated between a range of 39.28-39.39 and net FII outflow of 1880 crores. We believe that Monday movements is start of at least a week long correction stretching to 800-1000 points on Sensex. Technically major supports available to Sensex are 19,000 and 17,500.