Since hitting record highs back in March of 2015, the Indian Bombay 30 (also referred to as the SENSEX 30 or BSE 30) equity benchmark has been on a steady retreat after entering a bear market back in January of this year.  With global conditions continuing to deteriorate, the developments in the BSE 30 have mirrored changes in other emerging markets. As interest rates rise, investors are abandoning the yields available in emerging markets in favor of quality assets like US Treasuries, leading to outflows from the equities of developing countries. The BSE 30 has felt these flows, with both domestic and foreign investors pulling and reallocating funds that were previously in stocks. More momentum in the dollar combined with the possibility of two or more hikes during 2016 could increase the pace of these outflows, hurting any chance of a near-term recovery in the BSE 30.

Fundamentally Speaking

Performance in the BSE 30 has been particularly weak over the last 52-weeks, with the benchmark sliding by -9.50% due to the drag from natural resources companies that have borne the brunt of the retrenchment in global economic activity. During the same time period, only 9 out of the 30 index constituents have produced positive returns as investors dump equities and commodities in favor of other assets. Although domestically, the Indian economy is showing stellar growth metrics, with GDP climbing at a 7.30% annualized pace and unemployment under control, external conditions have weighed on heavily on the economy, specifically the weakness in the Rupee which has been a contributor to higher inflation.  Nevertheless, the real story in emerging markets continues to be the outflows from both domestic and foreign investors thanks to the changing monetary policy backdrop in the United States.

Although conventional wisdom dictates that a depreciating currency is positive for stocks, especially those with a global footprint, for emerging markets, this line of reasoning does not hold. For one, the rising dollar and monetary tightening in the United States is draining dollars from the financial system, a factor that is particularly detrimental for emerging markets that depend on the US dollar to facilitate trade. During the past 52-weeks, the Rupee has fallen by -6.20% versus the dollar and -1.82% year-to-date, underlining this point. Looking at the correlation coefficient, the relationship between the USDINR pair is historically inverse, meaning that weakness in Rupee translates to softness in the BSE 30. While the correlation coefficient between the Indian Rupee and Sensex 30 has actually neared zero, printing at 0.20 versus the 0.96 that was reported back in March due to evolving conditions, the relationship could revert quickly, contributing to renewed pressure on the index.