“A weakness in the US dollar rate against the rupee could be reflected in changing risk attitudes of investors,” said Mark Mobius, veteran emerging markets investor and founder of Mobius Capital Partners.
The US dollar index has firmed up since June 16, when the US Federal Reserve unexpectedly signalled an interest rate increase could happen as early as 2023. The hawkish outlook by Fed put a brake on the rally in riskier assets, which had been on a tear since March 2020 when the American central bank unleashed its gigantic monetary stimulus to cushion the economy against the effects of Covid-19. Since then, the dollar has weakened, resulting in money flowing into emerging markets and commodities. The dollar index had fallen close to 9% since late March, 2020 to May, 2021. A stronger dollar against the rupee lowers the value of foreigners’ Indian holdings.
“FII flows since March 2020 sell-off are touching close to the decade peak, which, benchmarked with the market’s own boundaries, seem to suggest that the risk of flows turning negative in the short run can’t be ruled out,” said HSBC in a note last week.
From January 1 to June 16, foreign investors have been mostly buyers of stocks here, pumping close to Rs 65,000 crore through exchanges.
The Nifty has more than doubled since March 2020 and has risen over 11% from the April lows, undeterred by the second Covid wave that was at its peak in May. The near-uninterrupted rise and growing concerns over the impact of the lockdowns on the economy have led to worries that the market has risen too fast too soon.
“Someday a correction must happen. Foreign investors have reasons to be worried: Weakness of emerging market currencies and a stronger dollar,” said Raamdeo Agrawal, chairman, .
Rich share valuations have also made investors wary of making aggressive purchases. At 20.4 times, Nifty’s 12-month forward PE is now at a 31% premium to its 16-year average, according to CLSA.
“Market-cap to GDP is around 115% and typically that’s when correction happens. The rally is looking tired and overdone at the moment,” said Andrew Holland, CEO of Avendus Capital Alternate Strategies. “The domestic market has more to do with high net worth individuals now and typically they are the first to exit when markets correct. Small and midcaps are rising sharply and everybody is being painted with the same brush.”
But, the recent outflows from foreigners may not be a reason to turn bearish on India, said Agrawal. “Big money is still sitting on the fence as they are waiting for a correction. Market is still on positive side than negative side. The underlying is not looking bad,” he added.
Samir Arora, founder of Singapore-based Helios Capital, said, “My guess is it’s a short-term issue perhaps driven by the significant outperformance of the Indian market calendar year to date. There is no worry on this account.”
