The last couple of days have been jarring for both the policy makers and investors. While rupee fell past 64-level against dollar, Sensex and Nifty are also hovering at around 11-month low.
Besides strong demand for the American currency from importers and banks, dollar`s strength against other currencies overseas amid expectation that the Federal Reserve will soon taper its bond-buying programme weighed on the domestic currency.
Shiv S. Shrivastava Managing Director & CEO of IGuru research said, “Fragile fiscal health mainly due to the soaring current account deficit is putting constant pressure on the rupee. Apart from that poor IIP growth, rising inflation, capital outflows have also added to further woes of the rupee.”
The rupee had logged the decade`s worst single-day fall of 148 paise to close at record low of 63.13 against the dollar on the first trading day of this week. Shrivastava said, “We had never thought that the rupee will cross this level. In worst case, rupee might touch 66-67 level. Though I hope rupee will show some positive correction but it will not come down below 58-level.”
Stock market too has plummeted in the wake of sharp depreciation in the currency. Declining for the third day today, Sensex dropped below 18,000-level to 17,970. Shrivastava says, “Market situation is really dire. This latest slump in rupee as well as stock market does not augur well for the investors. Though I cannot rule out the fact that there is a lot of trust deficit among investors as far as investment climate is concerned. But I am confident that market will not tank below 17500 level.”
Negative sentiments following the recent NSEL scam have also vexed investors. Shrivastava says, “Earlier the investors would be apprehensive of individual defaulters. But the recent jolt in the form of an exchange defaulter has shaken their faith. Trading volume, as a result of this, has witnessed a sharp fall.”
The government has taken several steps to alleviate rupee slide. The recent hike in gold import duty was one such measure. Shrivastava, however, believes that government might fail in its aim to reduce the current account deficit and thereby protect rupee from wilting further.
“The overall impact of rupee can be seen in the bullion market. The staggering fall in rupee has made gold imports costlier. I don’t think import duty hike will deter people from buying gold. People will certainly buy gold during festive and marriage season, even if they have to do it via illegal/black-marketing route,” he said.
With no immediate market improvement in sight, investors tend to press the panic button. Shrivastava is of the view that new investors should stay away from the market for a while. “There is no denying that major sectors like banking, auto, and realty are not doing well. The right thing to do for now is to wait for sectors like infra and banking to show some resilience. Once the market gains some stability (which depends on several factors like optimism in rupee, confidence of FIIs in the Indian market, return of FDI), the investors can go ahead,” he said.
It is true that the government has no magic wand to immediately come out with a cure for the sagging economic condition prevailing in the country. Policy decisions taken at economic level will need time to show results. We should be ready for that.