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After a relaxed holiday yesterday, the markets, urged by the tumbling rupee jolted everyone out of the comfortable reverie.

The stock market, in the morning was down over 275 points with the undertones changing from mildly negative to very negative; the moods remained despondent. Small and mid cap stocks are falling off the precipice and analysts choose to call this as a “value correcting” mode as most stocks were overvalued.

The culprit is undeniably the falling rupee. It rupee crossed the Rs.73-mark today morning and the fall seems to be relentless, with no real anchor in sight. On the other hand, crude oil prices have hit a multi-year low. Brent crude oil prices breached the $85 per barrel mark yesterday for the first time in four years on the back of tightening oil market and OPEC leaders signalling they will not be raising output in the near future.

The question comes to mind randomly – what is OPEC doing? The news doing the rounds is that even if oil races to $100/barrel, the OPEC is powerless to prevent the oil price rise and two reasons for this – China might comply with U.S. request to choke off the flow of petrodollars to Iran; Saudi Arabia’s inability to fully offset global supply. This essentially means OPEC is rendered powerless to prevent a supply shock and subsequent price spike in the final quarter of this year. US sanction on Iran is to take effect from November 4.

More than the rising price of crude, the market is more perturbed about the falling rupee. Three reasons for this too – apart from the spiraling crude oil price, the dollar gains on account of the strong US economy and another rate hike expected in December, it is widely expected that foreign investors will continue pulling out money back to the US dollar denominated asset. This is causing and will cause further outflows from assets in emerging markets, causing pressure on EM currencies.

Another reason attributed to the falling rupee is the major pullout of foreign portfolio investors (FPIs) out of equity and bonds. FPIs have pulled out close to $1.9 billion from Indian stocks and from debt is $7.1 billion in 2018. The outflow so far from equity and debt in FY19 is the highest witnessed since 2008-09.

The overall sentiment for the rupee remains negative as it is expected that capital outflows will continue with risk to the balance of payment turning negative in 2019 ratcheting up.

The RBI is scheduled to announce its Monetary Policy on 5th Oct and given the turmoil in the rupee, it is expected that the MPC will hikes rates by at least 25 bps. But the question is – will a rate hike alone help save the falling rupee? How can RBI rescue the rupee with a rate hike when its price duty is to keep an eye on inflation? With fuel prices on the rise, overall inflation is expected to also show a rise; thus RBI might have to come with some really out-of-the-box ideas to tackle the current situation.

The market is expected to hold on to this despondent mood till the 5th Oct. A rate hike, that too right in the midst of a festive season does not bode too well, especially for the auto sector.

While penning this report, we see that the Sensex has recovered and is now some 60 points down. Rupee too has regained some lost ground. News is doing the rounds that the Govt is holding talks with the RBI for a separate window for oil refiners to hedge their dollar positions. This means the oil refiners will buy dollars directly from the RBI instead of the market. The PSU refiners buy up to 70% of their oil needs through term deals and the remainder through spot markets. On the other hand, private sector players like Reliance use hedging tools to lock in costs on the international market.

Thus over the next few days, we will see the Govt taking steps to tackle this run on the rupee and that will remain a priority.  And that is tune to which the markets will sway to.

RBI, on 5th Oct would do best to focus on the turmoil in the financial sector as any further instability there, with a rate hike, could cause major harm. Thus stability should be the focus; it can always hike the rates later if the current Govt measures do not help anchor the rupee and lead to rise in inflation.  

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