InvestorQ : Do the rupee and the Nifty behave in a similar manner in the short term?
Priyanka Jain made post

Do the rupee and the Nifty behave in a similar manner in the short term?

Ria Roy answered.
3 years ago

If you look at the relationship between the Nifty and the INR/USD over a shorter period, the relationship appears to be quite strong around pivots. As mentioned earlier, around pivot points markets are driven more by sentiments and short term data rather than long term valuation measures. Hence the correlation between the INR/USD and the Nifty becomes more pronounced. We have seen that in 2008 and again in 2013, when on the downside there was a clear correlation between the fall in the rupee and the fall in the Nifty. Post 2016, it has worked on the positive with a strong rupee accompanying a robust Nifty index. Even post July 2018 when the rupee corrected sharply from 64/$ to around 74/$, the Nifty did see signs of distinct weakness during the interim period. How do we explain this causality?

This is more due to the vicious / virtuous cycle impact. When the FIIs sell aggressively, the impact shows quiet clearly on the Nifty values. At the same time FIIs are also converting their INR into dollars which increases the demand for the dollar. That is when the spiral effect takes off. The action of FIIs forces banks, importers and FCNR borrowers to also run for cover. That is how a vicious cycle gets into place. This takes time to stabilize and during this phase, we can see a positive correlation between the INR/USD and the Nifty. But, then the RBI intervenes and with a forex chest of nearly $400 billion it has the power to manage smoothness in the currency. Today, the RBI has access to the dollar spot and the dollar futures market and that works in their favour. That is why after some time such volatility automatically adjusts.

The moral of the story is that over the long run the Nifty is driven more by structural and fundamental factors. But in the short term, the INR and the Nifty do tend to correlate positively. That is the distinction that one needs to be clear about!