InvestorQ : Is it true that the Nifty and the currency value are closely related?
Swati Naik made post

Is it true that the Nifty and the currency value are closely related?

Priyanka Jain answered.
3 years ago

If you look at the last 10 years, we have seen the INR value versus the dollar and the Nifty moving in tandem on many occasions. Take the case of 2008 when the INR crashed from 42/$ to 50/$ even as the Nifty and the Sensex fell vertically. Again in 2013, when the US Fed first hinted at a tapering of its bond portfolio, the INR literally crashed from a level of 53/$ to around 68/$ in a span of a few days. This period was also marked by a sharp correction in the Nifty and the Sensex. To get a better picture, we have plotted the USD/INR exchange rate with the movement of the Sensex over the last five years. We have not considered the USDINR exchange rate but instead have considered the INRUSD exchange rate so that the relationship between currency and the Nifty is clearer. So what exactly can we infer from the chart below?

Text Box: INR/USD Exchange Rate and Nifty (base of 100)

Dollar Index.PNG

If one looks at the last five years performance, the connection between the exchange rate and the Nifty has not been too clear. During the five year period, the INR has depreciated by about (-11.46%) but during the same period the Nifty gave a positive return of over 70.44%. This huge divergence obviously raises some serious questions over whether there is any relationship between the INR strength and the Nifty returns over the longer term. The truth is that the relationship between the Nifty and the currency is not very evident in the long run, but during shorter periods, there is a clear relationship. That means; a weaker rupee also coincides with a weaker Nifty and Sensex.