Reasons for the Fall of Sensex and Rupee: Impact of Fed's Quantitative Easing Policy

The Sensex fell by approx. 770 points on Friday the 16^th of August, 2013 and another 290.66 points, today the 19^th of August, 2013. That is a fall of more than 1000 points in two working days.

The Rupee hit rock bottom at 62.70 today, at the time of writing this article and seems to be finding new levels to fall to at almost every trading session.

Quite a few reasons have been cited for the fall in the Rupee and the Sensex. Another set of rumours seem to have emerged from the US, with the Fed considering, yet again, a cut in Quantitative Easing or QE. The US is the largest economy in the world and has business interests in almost all countries across the globe. The dollar is one of the world's dominant reserve currencies; several countries use it as their official currency, and in many others it is the de facto currency, therefore any changes in policy in the US will be felt in financial markets across the globe. Especially in emerging markets like India where there is substantial investment of private American companies.

A cut in the QE would mean that the flood of easy FII money that has been coming into the system will reduce to a trickle or stop altogether. Based on this sentiment the markets and the rupee have fallen.

Sounds pretty cut and dry doesn't it? FII's withdraw money, so obviously the markets are going to fall sharply, as is the rupee. Dig a little deeper and you will see the reason for worry.

FII participation has increased from approximately USD 6 billion in CY 2003 to approximately USD 24 billion in CY 2012, in Indian stock markets. A glance at the table below will show you that Retail participation has subsequently fallen. The assumption being that inflows into equity mutual funds are inflows mobilized from the public and has very little corporate money, so when we do see a cumulative growth of 2.3 Billion, it is not even a blip on the 110 billion of FII money that has come in.

Healthy retail participation in stock markets not only insulates the market against global shocks like these but also indicates the faith that the common man has in the companies which operate in his country and make up the stock market. It would seem from these numbers that the common man has less confidence in equities does not want to put his savings into equity markets. The powers-that-be face an uphill task of restoring the confidence of the investor in the markets, else a slight tremor in any major economy across the world, will result in a landslide in Indian markets and currency.

Past performance may or may not be sustained in future

Source: Sebi.gov.in

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