Currency movement to play decisive role in markets this week

The falling rupee continued to adversely impact the equity market all of last week. When trading ended on Thursday - markets were closed on Friday due to Muharram - the BSE Sensex stood at 20,399.42 points, down 1.3 per cent or 266 points since the start of the week.

With the rupee dropping below 63 to the US dollar, the markets too slid in the first part of the week. After US Federal Reserve Vice Chairperson Janet Yellen indicated on Wednesday evening that the quantitative easing of the US economy would continue for the time being off, without any tapering off as was widely being feared, the markets improved marginally on Thursday.

Yellen's statement has made a difference, but in the absence of any domestic stimulus such as more reforms or a surge in economic growth, it can only help up to a point. Liquidity - money flow - alone will dictate the course of market movement.

Currently the market is gripped with uncertainty. Despite many efforts, the government has failed to bring down inflation and that has restricted the Reserve Bank of India (RBI) from bringing down interest rates. Inflation, especially food inflation, is unlikely to fall in coming days. With clear directions from the government to control rising inflation, the RBI will not hesitate to tighten rates. This will keep the equity market volatile.

With no major domestic event expected, currency movement will play a decisive role in the markets this week. Volatility will continue and investors would do well to watch and watch, doing little.

In fact, investors could look to other avenues like government securities (G-Sec). The 10-year G-Sec is trading above 9 per cent. It can be a good time to invest in G-Sec as, when it falls, investors can make healthy capital gains on the securities.

In the markets, investments should be stock-specific, looking at those trading well and not highly leveraged.