The benchmark S&P BSE Sensex closed at 19,367.59 on Wednesday, a decline of 5.26 per cent from a 52-week high of 20,443.62 on May 20. The Indian rupee, which tanked to a record intra-day low of 61.80 against the dollar on August 6, has fallen over 12 per cent since the start of the fiscal year.
Marketmen say sentiment is low because of the country's high fiscal deficit, inflation, falling industrial growth, expected withdrawal of the US quantitative easing programme and strengthening of the dollar.
"If the Indian rupee stabilises and CAD improves, then probably we can see markets scaling higher," said Paras Bothra, research head at Ashika Stock Broking. "At present, there is a downtrend in markets and gradually it would react on how the indicators improve and probably we might see a reversal in trend then and stocks may stage a comeback in the last part of the year."
According to Alex Matthews, research head at Geojit BNP Paribas, the major issues are how the CAD and volatility in the currency market are tackled.
"If interest rates come down, the rupee stabilises and the CAD reduces, then the markets would move up to 21,000. But if things do not favour equities, then it might fall to 16,500," Matthews said.
Since mid-July, the Reserve Bank of India has announced a slew of liquidity tightening measures to curb volatility in the exchange rate.
On July 15, the RBI raised short-term borrowing rates and limited banks access to liquidity by way of restricting borrowing from the repo window to Rs 75,000 crore.
On July 23, the central bank directed banks to draw only 50 per cent of their total deposits in overnight borrowings and maintain a 99 per cent average cash reserve ratio on a daily basis.
The government has announced measures, including easier overseas borrowing norms, to