The rupee at 56 – what does it mean to investors? In dollar terms, the much beaten equity assets have only got even cheaper. Risk averse domestic investors who assumed that debt was the safest investment in turbulent times have been badly hit. Money invested in Indian rupee debt has lost significantly in dollar purchasing power. By choosing debt over equity, domestic investors have achieved nothing. On the contrary, they have lost value in dollar terms. That equity has already fallen by 10% this year makes it even more compelling for global investors. Will they come in and buy like they did in the January – March quarter? We believe they have little option but to allocate more monies to India as the cornered Indian government will be forced to reform.
The oil price hike was actually received positively by the markets. That the government was ready to take tough calls to revive sentiment was a positive sign. The coming days will see how other reform moves like diesel/ LPG price hike, FDI in retail and FDI in aviation progress. If the government manages to push through much needed reforms, the markets should see inflows resume. Domestic investors have stayed off equities and show no signs of returning. The markets will see the next move after the monsoon hits the country’s coast. Meanwhile, the weak rupee and the will to reform will dominate the market mood.