This week the market trade in ranges with negative bias, as profit booking will continue till the Budget presentation, amidst escalating currency war.

The domestic market, which has been depending too much on foreign institutional investments of late, will see higher volatility in the coming months, as the currency war is getting stronger across the world as each country is trying to protect their domestic financial health.

Venezuela, the latest to join the war, last Friday devalued its currency - Bolívar - against the dollar by 32 per cent. The move will help Venezuela in cutting down on its imports by making foreign goods more expensive, and increase its exports which will help generate more jobs by making a bigger demand for its goods.

Venezuela now joins, among others, Japan, Germany, the UK and South Korea in the race to the bottom in an attempt to push up exports and fix their slowing economies.

Fluctuations in currencies’ value can directly impact foreign investments, and most of the time these fluctuations affect the risks of investing in non-US assets. While sometimes these risks work in favour of foreign investors, other times they affect them badly.

For example, let’s assume the foreign investment portfolio of an US investment banker generates a 10-per cent in Indian equities, but the rupee weakens 10 per cent against the dollar. In this case, the net return will be enhanced to the extent the rupee falls against the dollar (that is, 20 per cent) when the US investor converts his profits to the dollar. This will make international investments more attractive. On the other hand, the reverse is also true; if the Indian stocks decline or stay flat and the rupee strengthens (against the dollar) sufficiently, then it dampens the returns of the foreign investor’s position.

On the other side, devaluation will impact the economy as well.

Recently, while speaking to Reuters Television, Finance Minister, P. Chidambaram, said: “It's still early to call this a currency war, only Japan has depreciated its currency.” He added: “I sincerely hope other countries do not get into competitive depreciation of their currencies.”

“It will hurt us very badly. Our exports are down this year compared to last year because of the global situation...If (there is currency war), our exports will suffer even more,” Chidambaram had expressed his concern.

The market will wait for more reform announcements in the Budget before resorting to buying. Individual stocks will also see activity based on their September-December quarter financial performance. This week, ONGC, JP Associates and Tata Power Company will unveil their Q3 results on February 11; Jindal Steel & Power (Feb 12); Tata Steel, Coal India and BPCL (Feb 13); and Tata Motors, DLF, State Bank of India, GAIL (India) and Dr. Reddy's Laboratories (Feb 14).

> badrinarayanan.ks@thehindu.co.in

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