Markets and Rupee bounce off lows but not out of the woods yet

Both the benchmark indexes – Sensex and Nifty bounced off the lows that the markets started the trading day with. Nifty closed just over 5400 after touching a low of 5306 in the first ten minutes of the trade. The nifty had lost close to 8% in just over two sessions by then. Sensex after a 1000 point fall in two days, started over 300 points down before closing down 61 points at 18246.

Equities were not the only one that had a bad start. Rupee had an identical start with the currency losing close to 1 Re to the dollar touching an all time low of 64.13 before bouncing off the lows and ended the day at 63.25 down 12ps over yesterday. Some market participants believed that RBI had sold dollars thru PSU banks which led to the pull back in the Rupee. Bond yields also shot up in tandem with the weakening rupee. The 10 Yr G-sec ended the day at 9.27 up 4 bps (100 bps is 1%) after touching an intraday high of 9.48%, a level not seen in close to a decade.

Banks, after the carnage of the last couple of sessions ended in the green after the bond yields cooled. Infra and Realty stocks were the other stars in today's market. However IT and auto stocks were not as lucky. Oil and Gas also had a good session in anticipation of the Govt taking some action by way of Diesel price hike.

Though today may not go down as a very bad day in the current scheme of things the over all direction in which the markets have been trending gives no comfort on what is in store for our markets. The minor pull back is far from enough to lift the markets from the hole they have crawled into. It is totally concievable that the currency may pull back another 50ps to 1 Re or even a bit more in the immediate term owing to the fact that the currency looks extremely over sold in the immediate short term but there is no long term justification for the currency to go anywhere significantly up from here.

The fall in the currency is not scary but the pace with which the markets have cracked is what has scared the day lights out of most of the participants. The level of Rs. 64 to a dollar was a level the experts were expecting by the end of Dec'14, but the level has come as early as Aug' 13. The currency has lost 6% in little over couple of sessions. Such fall is a par for the course in the life of an equity market but these are not the norm for currencies. But the fact that there are not many things that the Govt can do from here it would be too adventurous to try and call a bottom. Any rise is only going to serve as a shorting opportunity for the bears. A snap back rally is very much given but is not going to be sustainable.

The biggest wory therefore is that the equities will continue to fall and that the bond yields will continue to raise until the fall in the currency subsides. So it is tough to imagine what is in store for us in the next few weeks and months, especially once the Fed starts to taper the bond buying programme.

Meanwhile the US markets have opened in a strong note after four consecutive days of weak closing. The EURO has also strengthened by 0.64% hitting 1.342 to a dollar, a level not seen in the last six months. This should also give a leg up to our currency tomorrow.

Well thats for today folks. Lets see what unfurls tomorrow.

----- Harish Sridharan