Fears that the US Federal Reserve might tighten monetary conditions by raising interest rates faster than anticipated drove the Indian rupee to its lowest levels in a month on Wednesday. The currency, which dropped for a second day to close at 60.9550 per dollar, was under pressure as higher interest rates in the US could lower the attractiveness of emerging market assets ? policy officials are set to meet on September 16-17. Other emerging market currencies too gave up some ground with the Brazilian real, the rouble and the ringgit losing anywhere between 0.4% and 1%.
On Tuesday, the Dollex had strengthened to a 14-month high as markets foresaw the possibility of monetary conditions in the US being tightened with an improvement in economic conditions while the S&P 500 logged its biggest fall in a month. The weak sentiment percolated down to Asian equities, which retreated on Wednesday with the benchmark MSCI Asia dropping to the lowest level in four weeks. Other regional indices gave up anywhere from 0.4% to 1.9% ? India?s benchmark Sensex came off by 0.8% to 2,7057.41 points. However, European markets recovered some early losses on an assurance by Chinese Premier Li Keqiang that the Chinese economy would not see a hard landing and that the government would work to ensure a medium to high growth rate.
Back home, treasurers are not overly concerned about the currency given the current account deficit has been reined in ? the CAD came in at 1.7% of GDP for the June quarter. Hitendra Dave, head of global markets at HSBC, said that that by the looks of it, this was just a larger global dollar strength move. ?This is a very technical move of the currency and there is no need to worry,? Dave told FE.
However, strategists are turning cautious about the Indian stock markets primarily on concerns that investments are not picking up and have warned there could be some turbulence over the next few months. ?We do not rule out a correction over the next few months if the government is unable to fix India?s investment challenges quickly and recent developments do not augur well for the banking system?s NPLs, in our view. Also, market valuations are quite full even on our assumption of strong growth in net profits for most sectors,? Kotak Institutional Equities wrote in a report on Wednesday.
