The downward spiral in the Indian rupee poses a significant threat to the country’s equity market, according to one strategist, who warns that continued weakness in the currency could prompt foreign investors to flee domestic stocks.
The weak rupee has depreciated 10.8 percent against the U.S. dollar this year, making investment returns less attractive for foreign investors, who are a major driving force in the market.
“When an emerging market currency does not respond positively to policy liquidity tightening, the market is in deep trouble. Therefore, further price weakness in the currency could plausibly drive further weakness in the equity market,” said Nicholas Ferres, investment director, global asset allocation at Eastspring Investments, referring to the Reserve Bank of India’s recent measures to tighten liquidity in order to make it more difficult to speculate against the currency.
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