Sunday, December 5, 2010

INR movement v/s Indian Equity

The two charts shown above illustrates the correlation between INR and S&P CNX Nifty from jan 2007 onwards, this clearly indicates that stronger rupee shows bullish sentiments of FII, although now DII also contributes significantly, in to Indian capital market.

The bar chart below shows the net FII inflow in Indian capital markets in the same period which partly explains the stronger or weaker rupee in the period of study. Although the value of rupee depends on many factors including Global currency trends, Oil prices as India is a big importer of petroleum, RBI policies and off course political factors this study mainly deals the change in rupee with respect to FII movements.

FII have started selling in huge quantities starting nov 2007 till October 2008 thus contributing to the weaker rupee. Technically rupee has strong support at around 44 levels this may indicates that net FII inflows are capped and at 44 levels FII out flow dominates the inflow. Same is visible in the chart above during April – may 2010 and Nov-2010.

We can conclude that the market rises with increase in FII inflows it could be long term or short term, This helps in stronger rupee even when the GDP is not so strong like the case in 2008, but this also means that if no FII flows coming in then the markets may have already made a top or some more correction before they make a new top.

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