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Analysts see more foreign exodus from Indian stocks

As more money flows out of India, it will hurt the rupee-dollar exchange rate, weaken the rupee further and put immense pressure on the country
Last Updated 07 May 2022, 12:53 IST

The US Federal Reserve’s decision to raise interest rates by a half percentage point and plans for additional hikes to fight raging inflation will make more foreign institutional investors pull their money out of India and deal a mighty blow to the rupee, economists and forex analysts told DH.

That is bad news for Asia’s No. 3 economy, which has already seen an unprecedented foreign selloff this year after the Ukraine war-related surge in crude oil prices led to worries about inflation in the world’s third-largest oil importer. A falling rupee could also potentially widen India’s fiscal deficit.

As more money flows out of India, it will hurt the rupee-dollar exchange rate, weaken the rupee further and put immense pressure on the country as it is forced to pay more for everything it imports from crude oil to other raw materials.

“For India, the prospect of higher rates in the US raises the risk of rate-sensitive portfolio flows reversing course from emerging markets and heading back to the US or advanced economies as returns there rise,” said Radhika Rao, Senior Economist, DBS Group Research. “Besides tightening financial conditions globally and at home, corresponding dollar strength could keep a lid on the rupee.”

The signs are already palpable with the Indian rupee weakening as much as 0.9% to 76.97 against the dollar earlier on Friday, its lowest level since March 7. It settled at 76.91, hurt by the strong dollar and stubborn oil prices which have risen more than 40% so far this year.

Every time the rupee falls by a paisa against the dollar, if crude oil price remains constant, India will end up paying Rs 110 more for a barrel of crude oil, explained Jateen Trivedi, Senior Research Analyst at LKP Securities.

Indian shares closed 1.6% lower on Friday and posted their worst week since November.

Though Fed Chair Jerome Powell said that it was not actively considering a 75-basis point increase, some analysts said this was possible if inflation went out of hand.

“If the Fed turns more aggressive relative to market pricing going ahead, the direct financial market impact will be negative for Indian assets,” said ANZ Research economist Dhiraj Nim.

Some said the Indian central bank’s move to raise the key lending rate by 40 basis points in an unscheduled meeting was an exercise in damage control.

“RBI hiking the rate half a day ahead of Fed suggests its determined stance to stem outflows on the back of shrinking policy rate” and to “prevent steep depreciation of the currency as the dollar gains in strength,” said Kunal Kundu, India Economist at Societe Generale.

The Fed rate hike will also affect the companies that depend on money from abroad.

“While rising bond yields translate into higher domestic borrowing cost, an increased Fed rate will affect the cost and also the availability of overseas finance for Indian companies,” Kundu said.

It will have other effects too.

“We can expect forex reserves to continue the declining trajectory it has been on since the peak towards the end of first half, last fiscal,” said Anand Dalmia, Chief Business Officer, investment service provider Fisdom.

As the Fed rate hike boosts FII outflows, weakens the rupee and makes India pay more for crude oil and raw materials, the RBI will be forced to act again.

“All these factors shall prompt the RBI to hike rates,” said Heena Imtiaz Naik, a currency research analyst at Angel One Limited.

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(Published 06 May 2022, 17:09 IST)

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