So confused right now that cant even think of a apt title for this article. Have left that exercise for the end.
Confusion is with what the markets seem to be suggesting.I am talking about the currency and equity markets.As of now USD-INR is 54.8 and Nifty is around 6100. Both looking placed at technically critical points, moves beyond which are generally not the garden-variety ones.
Last 3-4 weeks have seen some interesting movements in the global commodity markets which have significant ramifications for the Indian economy and markets, both currency and equity.
First gold prices have crashed to 1400 $ levels and second, oil prices have also corrected. While oil prices may not have crashed but even 5-7% correction helps.And you never know whats in store!!
Both the above developments are both unequivocally huge positives for the Indian economy. Lower gold prices helps reducing current account deficit and benefits of lower crude prices are also obvious.The other good news,though one-off, is the huge 5 bn USD open offer coming up in HUL by the parent company.
Before all this happened, INR was trending between 53.6 and 54.6 to the USD and the Nifty was around 5500-5600 levels.
Not unexpectedly markets reacted positively to all these developments and USD-INR moved towards the lower end of the range at around 53.6 and Nifty went closer to 5900-6000 levels in Nifty.
But in the last few days, things have changed slightly and the markets are now running in what can probably be called contradicting directions.
In the face of huge FII inflows in the stock markets, Nifty has moved forward and now standing around 6100 levels.But at the same time, USD-INR has made a move in the opposite direction and now stands at 54.8.
This currency depreciation as stock markets are getting within touching distance of the life time highs is what is really CONFUSING!!
I had articulated my opinion on the USD-INR in some previous articles.
Treadmill
60-65 on the Cards
Obviously,environment in which those were written have undergone changes, which are mentioned above.So what to expect now??
Logic would suggest that,given the changed environment,INR should appreciate with external deficit coming down and FIIs pumping in money like never before.I have certain reservations with that thinking. Rupee appreciation would mean all commodities where prices are USD denominated will see downtrend in INR terms.A possible deflation or very low inflation scenario. While that seems anything but negative,in the article below we have discussed the huge negative side effects deflation or very low inflation could PROBABLY have on the Indian economy.
Low Inflation - Good for India??
So if INR appreciation does come about,I think there could be huge negative side effects. And the above article has actually not discussed about effect of appreciation on trade deficits.That is unambiguously negative.
So while stock markets may do well, underlying economy and financial systems may come under increasing stress and thus slow down the Indian economy even further from what we are witnessing right now. That in turn would cause corporate profits to suffer and stock markets should logically react negatively to that, right??
But appreciation didnt come, at least not as of now. Stock markets went up and INR depreciated!!!
Confused??!!!
I am not sure this opposing movements can last very long. One of them has to concede and start reversing. So either INR has to start appreciating or stock markets have to start their downward journey.Obviously its difficult to predict if this will happen and in case it happens which market will reverse.
Trade fundamentals dont justify rupee appreciation but fund flows can change the arithmetic.
With so many moving parameters in terms of commodity prices,slowing global growth and crazy money printing leading to humungous fund flows into markets,there are no clear bets.
But I would go with what I think is fundamentally correct. That would be INR to depreciate and stock markets to give up their gains.
Either ways, I think a big move maybe coming....in both the markets.
There is something round the corner....
(Standard Disclaimer : The probability of my opinions going horribly wrong are closer to one than to zero!!)
First gold prices have crashed to 1400 $ levels and second, oil prices have also corrected. While oil prices may not have crashed but even 5-7% correction helps.And you never know whats in store!!
Both the above developments are both unequivocally huge positives for the Indian economy. Lower gold prices helps reducing current account deficit and benefits of lower crude prices are also obvious.The other good news,though one-off, is the huge 5 bn USD open offer coming up in HUL by the parent company.
Before all this happened, INR was trending between 53.6 and 54.6 to the USD and the Nifty was around 5500-5600 levels.
Not unexpectedly markets reacted positively to all these developments and USD-INR moved towards the lower end of the range at around 53.6 and Nifty went closer to 5900-6000 levels in Nifty.
But in the last few days, things have changed slightly and the markets are now running in what can probably be called contradicting directions.
In the face of huge FII inflows in the stock markets, Nifty has moved forward and now standing around 6100 levels.But at the same time, USD-INR has made a move in the opposite direction and now stands at 54.8.
This currency depreciation as stock markets are getting within touching distance of the life time highs is what is really CONFUSING!!
I had articulated my opinion on the USD-INR in some previous articles.
Treadmill
60-65 on the Cards
Obviously,environment in which those were written have undergone changes, which are mentioned above.So what to expect now??
Logic would suggest that,given the changed environment,INR should appreciate with external deficit coming down and FIIs pumping in money like never before.I have certain reservations with that thinking. Rupee appreciation would mean all commodities where prices are USD denominated will see downtrend in INR terms.A possible deflation or very low inflation scenario. While that seems anything but negative,in the article below we have discussed the huge negative side effects deflation or very low inflation could PROBABLY have on the Indian economy.
Low Inflation - Good for India??
So if INR appreciation does come about,I think there could be huge negative side effects. And the above article has actually not discussed about effect of appreciation on trade deficits.That is unambiguously negative.
So while stock markets may do well, underlying economy and financial systems may come under increasing stress and thus slow down the Indian economy even further from what we are witnessing right now. That in turn would cause corporate profits to suffer and stock markets should logically react negatively to that, right??
But appreciation didnt come, at least not as of now. Stock markets went up and INR depreciated!!!
Confused??!!!
I am not sure this opposing movements can last very long. One of them has to concede and start reversing. So either INR has to start appreciating or stock markets have to start their downward journey.Obviously its difficult to predict if this will happen and in case it happens which market will reverse.
Trade fundamentals dont justify rupee appreciation but fund flows can change the arithmetic.
With so many moving parameters in terms of commodity prices,slowing global growth and crazy money printing leading to humungous fund flows into markets,there are no clear bets.
But I would go with what I think is fundamentally correct. That would be INR to depreciate and stock markets to give up their gains.
Either ways, I think a big move maybe coming....in both the markets.
There is something round the corner....
(Standard Disclaimer : The probability of my opinions going horribly wrong are closer to one than to zero!!)
2 comments:
Set up a pair trade with INR-USD as one leg and Nifty position on the other. This could be skewed though in short term and hope to reap profits in long term.
Raghu....pls setup the trade...and share a part of the profit,if any...;-)
my disclaimer already puts negative consequences on your head...:-)
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