Weakening US dollar index may boost FPI liquidity in Indian market; largecaps to benefit, say analysts
- The sharp slump in the US dollar index last week, with the index closing below the February and April lows at the 100.82-100.85, reinforced analysts’ views that the American currency formed a major peak in September 2022.
The US dollar index plunged to a 15-month low against the basket of currencies, falling below the $100-mark last week as it suffered its biggest weekly drop of the year. On Monday, the US dollar index further slid by 0.13% to 99.831.
US inflation data released last week bolstered investors’ hopes that the Federal Reserve was close to the end of its interest rate hike cycle.
Adding further pressure, US producer prices barely rose in June and the annual increase in producer inflation was the smallest in nearly three years.
The sharp slump in the US dollar index last week, with the index closing below the February and April lows at the 100.82-100.85, reinforced analysts’ views that the American currency formed a major peak in September 2022.
According to CLSA, this breakdown provides an initial downside target of 95. Below this level, the lower boundary of the 2015-2022 trading range offers next support at the 88-89 area.
It noted that a falling dollar has typically resulted in stronger performance from emerging markets (EM), adding that both the EM ETF and EM Bond ETF are on the cusp of confirming fresh breakout signals.
“The relationship between the EM (USD) versus world ratio and the EM currency Index has been a tight one over the years. The clear implication here is this week’s breakdown in the US dollar (strength in the EM currency Index) should support a rerating in EM versus World through 2H23. In absolute terms, the EM ETF (EEM US) is on the cusp of confirming a breakout from the year-to-date triangle consolidation pattern,” CLSA said in a note on July 14.
Parth Nyati, Founder of Tradingo, a discount broking firm, expects the dollar index could potentially target the downside level of 97.5.
On the domestic side, a falling dollar has helped sustain inflows from foreign portfolio investors (FPI) into Indian equities. In July so far, FPIs have pumped in ₹30,660 crore into the Indian equity market.
Also Read: FPIs extend buying streak in Indian equities, infuse ₹21,944 crore in July so far; check details
“The decline in the dollar index to below 100 on Friday, the lowest level in one year, is favourable to emerging markets. India is the largest recipient of FPI flows YTD among emerging markets. The selling in China continues and FPIs were sellers in EMs like Thailand and Vietnam also recently,” said K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
He believes the declining dollar is a powerful trigger that can sustain the FPI inflows.
However, he raised concern over the rising valuations of the Indian market which are getting stretched.
“The valuations in China (PE is 9) is hugely attractive now compared to valuations in India (PE is around 20) and, therefore, the ‘Sell China, Buy India’ policy of FPIs cannot continue for long,” he cautioned.
Coining similar views, Avinash Gorakshakar, Director Research, Profitmart Securities said that a weaker dollar index will further boost FPI inflows in Indian markets.
“The Indian market will see further FPI inflows and increase in liquidity as the dollar index remains below 100 level. The domestic equity market is witnessing a huge liquidity driven rally which will get further momentum with the falling dollar index,” Gorakshakar said.
He also believes the index-based stocks, basically the large cap stocks, to be the foremost beneficiaries of foreign capital inflows.
Gorakshakar is of the view that, going ahead, the comments from the US Federal Reserve and June quarter corporate earnings would be key triggers for the Nifty to hit 20,000 level.
Reiterating that a weaker dollar index is generally considered beneficial for emerging markets, including India, Nyati added, "this trend is further supported by the aggressive buying activities of Foreign Institutional Investors (FIIs) in the Indian market. With the dollar index expected to remain weak, it is likely to enhance the flow of investments from FIIs, contributing to the overall strength of the Indian market.”
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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