Tremors in The Currency Market
- Domestic stock markets and the rupee faced rough weather in early trading on recently as the sharp rise in US inflation triggered concerns over more aggressive rate hikes and stronger capital outflows.
What is the reason?
- In the first session, Indian equities sank 2.6 percent as equity markets around the world sold down after US May inflation data jumped to a four-decade high of 8.6%, stoking fears of aggressive rate hikes by the US Federal Reserve at its next monetary policy meeting on Wednesday.
- Treasury yields in the United States soared to a 14-year high of 3.15 percent, while the dollar index climbed above 104 points.
- After the massive sell-off on Friday, US futures are also down 1%. Apart from that, the market will remain cautious ahead of this week’s meetings of major central banks.
- The rupee is under pressure due to rising US inflation, fears of rate hikes, and a drop in the stock market.
- Foreign portfolio investors (FPIs) have already withdrawn out Rs 18,814 crore from the equity markets in June as a result of more rate hikes by the US Federal Reserve.
- Since January this year, foreign portfolio investors (FPIs) have taken out Rs 2.40 lakh crore from India, putting pressure on the rupee.
What is Foreign Portfolio Investment?
- FPI is a mode of investment in which investors hold securities and other financial assets in other countries. FPI holdings can include stocks, ADRs, bonds, mutual funds, and exchange-traded funds.
- Unlike FDI, FPI consists of passive ownership; investors have no control over ventures or direct ownership of property or a stake in a company.
- The fall in the rupee is likely to make imports costlier and exports lucrative.
- However, runaway depreciation might not happen amid RBI intervention
- The Indian market will only stabilise once the US market has stabilised and the US Fed’s rate rises have ceased. When FPIs return and start pumping money again, the market will rebound.
Source The Hindu
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