Steep Rise In Asian Stocks In FY 2021 Fuelled By Dollar Liquidity In The System

Published 05-04-2021, 11:48 am
Updated 09-07-2023, 04:02 pm
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During the FY 2020-21, all the Asian stocks registered a sharp rise due to abundant dollar liquidity in the overseas markets arising out of a huge stimulus package released by developed countries in the globe. KOSPI registered a huge gain of 74.54% followed by a 69.25% gain in the Taiwan Weighted Index. Local stocks gained significantly with the BSE Sensex and Nifty 50 posted gains of 68% and 70.50% in the above referred period. The MSCI Asia-pacific index excluding Japan registered a rise of 55.23%. On the first day of the new financial year, the BSE Sensex and Nifty 50 recorded a rise of 1.05% and 1.20% respectively, raising optimism for further gains in domestic stocks in the coming weeks. The local stock market is currently ignoring the rise in the dollar index against the major currencies and only the quantum of equity inflows in the current year would direct the stock market trend in the immediate term. During the last financial year, the portfolio equity inflows was USD 37.09 billion, the highest inflow recorded in one single year in the last decade.

In the current financial year, we expect the rupee to depreciate by about 3 to 4% from the closing level of 73.1050 as of 31-3-21. The expected decrease in the quantum of dollar inflows into the market and weakness in the emerging market currencies over a period of time shall have the potential to drive the rupee lower. However, the huge forex reserves which include the forward dollar purchase position of RBI will restrict any sharp depreciation in the rupee exchange rate beyond 74.30 level.

Despite India’s weak macroeconomic data, the huge accretion in forex reserves by USD 112 billion in FY 2020-21 represents the portfolio, FDI, PE and other capital inflows which led to an appreciation in the rupee exchange rate by 3.40% against the dollar. The RBI’s active intervention in the market smoothened the rupee’s rise and prevented any sharp appreciation in the rupee which would have been detrimental to export growth besides disallowing any further overvaluation in REER.

Exports and imports surged by 58% and 53% in March boosted by the base effect. In March 2020, exports had dropped by 35% as the impact of covid started slowing. Exports shot up to USD 34 billion in March 2021, while imports rose to USD 48 billion resulting in a widening of trade deficit to over USD 14 billion in March 2021, compared to USD 10 billion a year ago. A rise in non-oil imports by over 62% in March and a pick-up in Indian exports to the US and Europe is heartening to note for policymakers.

The stimulus progress being announced by the US shall increase the inflationary pressure and push up the US yields. The 10-year US T-bond yield registered a steep rise of 108 bps in FY 2020-21. The swap spread between the 3-month USD Libor and 5-year USD fixed swap rate widened to 103 bps as of 31-3-21 from 53 bps at the beginning of the last financial year. The steepness in the US bond curve is better demonstrated by the differential between 2-year and 10-year US yield which is currently at 115 bps and expected to increase as the long-term bond yields rise on expectation of robust economic recovery expected in the US.

It is interesting to note the 3-month USD Libor dipped by 125 bps and 6-month USD Libor registered a drop of 97 bps in the last financial year, as a result of zero interest rate policy being adopted by Fed and the accommodative policy stance expected to continue at least till the end of 2022.

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