MUMBAI: Investors have punished stocks and currencies of most emerging markets whose current account deficits (CAD) have widened. On Monday, India’s stock indices tumbled 1 per cent and the rupee fell to record low after CAD increased to a four-quarter high. A rising CAD means the economy imports more than it exports. This puts pressure on the currency.
So far, India has stayed relatively resilient despite the weakening rupee because of strength in a few stocks. Economists said India’s CAD is expected to widen to 2.5-2.8 per cent of the GDP in the current fiscal due to higher oil prices that has been accentuated by rupee depreciation. This could put pressure on Indian equities market, said fund managers.
“There are several discomforting factors like widening CAD, falling rupee, rising crude are impacting the sentiments of the market, which is currently directionless” said A Balasubramanian, CEO, Birla Mutual Fund.
The situation is far worse in other emerging markets like Turkey, Argentina and Egypt. Nomura said that seven countries, Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine are at risk of an exchange rate crisis as investors reassess their investments following the contagion in Argentina and Turkey. The unwinding of the easier monetary policy in the US is fueling further volatility in the currency markets.
“We expect the INR to remain under pressure on the back of intensifying of the EM crisis and fear of a contagion and broad based US dollar strength coupled with a deteriorating domestic macro scenario and domestic political uncertainty” said Suvodeep Rakshit, senior economist, Kotak Securities If currency weakness continues, then this could become a bigger headache for the financial markets, said experts.
“We are expecting CAD to widen further this fiscal with declining rupee which could be a big trouble for financial markets” said Saurabh Mukherjea, founder, Marcellus Investment Managers.
Investors should rejig their portfolio to hedge against the current crises, said analysts. “For investors, we believe that it is time to rejig the portfolio by adding quality companies from sectors that stand to benefit from the continued depreciation in the rupee, by taking some profits out of the performing consumption-driven companies” said Gaurav Dua, head of research, Sharekhan. “Also, investors should look at accumulating some of the corporate focused bank stocks gradually.”
Source: economictimes.indiatimes.com