In the last one month, at the Bombay Stock Exchange, the Dollar Index has moved opposite to the bellwether Sensex, except for five days. The way the two indices have moved in reverse direction is a good indication of how the overseas investors as a group are picking Indian stocks.

The Dollar Index, which measures the performance of the dollar against basket of other major currencies, closed down at 75.39 on Friday from its previous day?s close of 75.66. Compared to this, the 30-share Sensex of the Bombay Stock Exchange (BSE) closed higher by 0.92% at 16848.83 points. Similarly, during the previous day when the dollar index gained 0.74%, the benchmark Sensex dropped 0.91% despite the economy reporting robust industrial production data.

?Each time there has been a significant change in the dollar index, we have indeed seen a corresponding change (opposite) in the Indian equity indices,? says a fund manager with an overseas fund house. During the month of October 2009, net FII investment stood at Rs 9,077.30 crore, over 50% less compared to their net purchase of equity worth Rs 18,344.40 crore during the previous month. The current month is also witnessing a similar trend with their net investment at just Rs 2,878.40 crore till now.

Experts reckon that the long-term investors are right now reworking their strategies as many of the second quarter results from India Inc failed to meet expectations. And at the moment there is a strong presence of speculative monies engaged in dollar carry trade dominating the FII presence in India.

Traders are now using the dollar index as a reference for future trends and building trading positions.

?We are preparing for a sell offs in equity markets when the dollar stops weakening and we have seen hat buying emerging when the dollar stops strengthening, which means the peaks and bottoms of dollar should be watched out on technical charts and successful predictions on the same can help trade equity with precise timings,? says a technical analyst.

?It is purely a liquidity game currently going on rather than fundamental one. Hedge funds are involved in a carry trade by borrowing cheap in dollar terms and deploying funds in other assets classes or commodities,? said Deven Choksey, MD, KR Choksey Securities.