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Friday, June 10, 2011

What’s dragging down Indian capital market?


Indian capital market is under bearish sentiment due to fears posed by high inflation which is usually followed by monitory tightening of RBI to curb it.
Besides this Quantitative Easing programme (QE2) by US Federal Reserve under which there was buying of treasury products worth $600 billion, is supposed to end by June 2011.Termination of quantitative easing shall make liquidity tighter, which might force investors to unwind their long positions in capital markets of emerging nations like India.
Around 30-40 percent of money flowing in emerging markets belongs to hedge funds which are prone to interest rates and exchange rates.For past couple of days USDX is rising and inverse relationship of USDX and Sensex/Nifty is quite evident.
When dollar gets stronger, invested funds have tendency of returning back to USA which also exerts pressure on Indian bourses.
As in following chart, trend lines show surging USDX for past couple of days and FII net outflow was around ì  65 crore for this period.

Chart Courtesy: FXtrek
 One more fear is that yesterday’s food article's inflation might force RBI to hike policy rates further, which shall affect Indian GDP growth story.
All this reasons are dragging Indian bourses down.

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