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Indian stocks join global rout, but analysts see an opportunity to buy as economy shows strength

The Indian stock market joined a global equity selloff on Friday, as the rupee logged its biggest drop since January 24 and foreign institutional investors (FIIs) offloaded stocks in bulk for the third day in a row.

There was fear on the Street that the rout could deepen, as strong signs of growth in the US will strengthen the case for an early interest rate hike by the Fed, which can trigger reverse flow of FII money that fuelled the global stocks rally over the past two years.

Market analysts tried to assuage such fears, calling it a collateral damage from a European contagion caused by a debt default by Argentina and weak economic data from the euro zone. Some even advised domestic investors to buy on dips.

“There are two reasons for the fall. Some long portfolio investors, who would have had their portfolios pegged to the rupee, offloaded shares to derisk their investment on seeing the Indian currency fall to the 61 level against the dollar. Secondly, trading funds booked profits in India to offset their losses in other global markets. The two factors combined to pull down Sensex and Nifty,” said Deven Choksey, managing director of KR Choksey Shares & Securities.

Market sentiment also turned downbeat after India’s fiscal deficit crossed half the budget estimate in the first three months.

BSE Sensex declined 414 points or 1.6 per cent to 25,480, while NSE Nifty fell 118.70 points or 1.54 per cent to 7,602. Both the indices were at their lowest closing levels since July 15.

“Nifty at 7,450-7,500 levels will be a good entry point,” said Choksey. “This selloff has nothing to do with local factors. The situation will be arrested sooner than later. There will be buying at the lower levels.”

Domestic institutional investors bought shares worth around Rs 2,500 crore over the past two days.

Their confidence seems to grow from some strong indictors for the domestic economy. The HSBC manufacturing purchasing managers’ index (PMI), compiled by Markit, on Friday showed factory activity expanded at its fastest pace in 17 months in July, as firms responded to burgeoning new orders by increasing output.

Government data on Thursday showed the eight core sector industries grew at the fastest pace in nine months this June, at 7.3 per cent, signaling a pickup in economic activities.

Some analysts called the market crash a knee-jerk reaction to the US Fed announcement of further cut in its monthly bond buying. They felt India’s refusal to sign the WTO deal also disappointed the market.

FIIs sold shares worth Rs 1,654.86 crore on Friday and worth Rs 1,510 crore on Thursday following the US Fed announcement on Wednesday night that it was on track to wind down the bond buying programme before the end of this calendar.

The rupee has plunged in tune with the FII selloff, depreciating by 49 paise on Thursday and another 63 paise, or 1.04 per cent, on Friday to end the week at a four-month low of 61.18 against the US dollar.

Continued weakness in the domestic currency can scare off overseas investors, though chances are that the central bank will intervene to arrest any sharp decline.

India’s forex kitty surged for the eight consecutive week, rising by $2.714 billion to $320.564 billion on a healthy increase in core currency assets. The total reserves are just shy of the all-time high of $321 billion achieved in late 2011.

Deep N Mukherjee, senior director at India Ratings & Research, said around 53 per cent of BSE 500 companies, which are net importers and who account for 70 per cent of balance sheet debt, have historically suffered a 1.3 per cent erosion in Ebitda for every 1 per cent depreciation in the rupee.

Dipen Shah of Kotak Securities, said quarterly earnings, geo-political factors and the progress of monsoon would determine where the market heads from here.

Also, all eyes will be glued to the next week’s credit policy, in which the market is expecting a dovish stand by the central bank. Analysts felt a rate cut could be negative in a weak rupee environment. Economists in a Reuters poll released on Thursday said they didn’t expect a rate cut anytime soon.


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