The BSE Oil & Gas index has been the most affected, falling 20% since the Nifty50’s peak. Other key indices have also seen notable declines, including the BSE Auto (15%), Realty (14%), and Metal (13%) indices. In contrast, the BSE Information Technology index has shown relative resilience, declining by only 3%.
Since Donald Trump’s election victory on November 5, the Dollar Index climbed from 103.4 to a high of 106.96 on November 15 and stands at 106.35 today. During this period, the Oil & Gas and Metal indices fell by an additional 6%, underlining the prolonged impact of a strengthening dollar on import-heavy sectors.
A stronger dollar raises the cost of dollar-denominated imports, particularly energy and industrial commodities. This has led to margin pressures for sectors reliant on imports, such as oil and gas and auto manufacturing, which depend heavily on crude oil and imported components.
If the dollar’s strength continues, export-dependent sectors like IT and pharmaceuticals could face additional challenges despite their current resilience. While a stronger dollar generally benefits IT firms due to favorable forex rates, reduced global demand could offset these gains. Interestingly, the BSE IT index has risen by 2% since Trump’s victory, indicating some resilience.
Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, remarked, “With the dollar index strong above 106 and the 10-year U.S. bond yield at 4.44%, there is no room for a quick reversal of FII flows. Investors can focus on areas of strength like digital companies and high-quality banking stocks.”Meanwhile, according to Gavekal Research, the Republican administration’s expected policies, including tax cuts, increased government spending, and deregulation, could boost US economic growth and inflation, strengthening the dollar further.Although the Federal Reserve (Fed) has been easing policy in response to disinflationary pressures, but a shift in fiscal policy could force the Fed to alter its stance. If the Republicans’ policies trigger inflation, the Fed may be forced to halt its easing cycle and even consider rate hikes. A reversal in policy could strengthen the U.S. dollar further.
Federal Reserve Chair Jerome Powell highlighted the cautious stance in a recent speech, stating, “The economy is not sending any signals that we need to be in a hurry to lower rates.” Powell emphasized that inflation remains a concern, with policymakers aiming to ensure it stays on a sustainable path toward 2%.
For further market indications, Vijayakumar commented, “Even though Nifty has corrected around 10% from the peak, there are no signs of a sustained recovery in the market. Relentless FII selling, earnings downgrades for the majority of stocks for FY25, and the consequences of the Trump trade are weighing on the market. Sentiments have turned negative, and therefore, investors should exercise caution at this stage and wait for clarity on the direction of the market.”
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)
