The recent depreciation of the Indian rupee, which reached record lows of 83.85 against the US dollar on August 5 and August 6, 2024, has had a significant impact on the Indian stock markets, resulting in notable declines and heightened volatility.
Immediate Impact on Stock Markets
On August 5, 2024, the Indian stock markets experienced a sharp selloff, with the Sensex plunging 2,223 points, closing at 65,495, and the Nifty ending near 24,050, marking a decline of nearly 3.2% . This marked one of the most severe drops in recent times, influenced by a combination of global and domestic factors.
Factors Contributing to the Market Decline
- Global Economic Concerns: The downturn in global markets, fueled by recession fears in the US, poor job statistics, and an unwinding of carry trades following a rapid rise in the Japanese yen, added pressure on the Indian markets.
- Geopolitical Tensions: Escalating tensions in the Middle East and uncertainty over China’s economic recovery contributed to global market instability, which in turn affected Indian equities.
- Foreign Portfolio Investor (FPI) Outflows: The elevated US bond yields have made American assets more attractive, prompting FPIs to pull out approximately ₹10,658 crore from Indian equities so far this month. This outflow has further exacerbated the rupee’s depreciation and market declines.
- Domestic Inflation and Interest Rates: Rising domestic inflation, with the CPI hitting a 15-month peak of 7.44% in July, has raised concerns over prolonged high interest rates in India. This has negatively impacted investor sentiment and market valuations.
Sectoral and Broader Market Impacts
- Sectoral Losses: Key sectors such as media, metals, real estate, and public sector banks saw declines of over 4% each. The broader markets also suffered, with mid and small-cap indices plunging significantly.
- Volatility: The India VIX, a measure of market volatility, surged by 42.23% to end at 20.3, reflecting heightened uncertainty and investor anxiety.
Future Outlook
While the immediate outlook remains volatile, there are mixed expectations for the future:
- Technical Resistance and Support Levels: Analysts suggest that the Nifty may find support in the 23,250-23,400 range, while resistance levels are seen around 24,500-24,700 in the event of a rebound.
- Long-term Resilience: Despite the current downturn, the Indian market has historically outperformed global markets in the long term. Factors such as robust GDP growth, progressive policies, and a favorable political landscape are expected to support a recovery once current global and domestic challenges are mitigated.
- RBI Interventions: The Reserve Bank of India’s active interventions in the forex market might help stabilize the rupee to some extent, potentially capping further declines in the near term.
Investors are advised to approach the market with caution, considering hedged positions to navigate the volatility. Long-term investors might view the current correction as an opportunity to accumulate quality stocks at lower valuations.
