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Shanthi Venkataraman

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BL Research Bureau The Sensex has gained close to 6 per cent over the past month, but that has made little difference to the portfolios of foreign institutional investors (FIIs).

The steep depreciation of the rupee against the dollar during this period has virtually flattened the monthly return for FIIs, who measure market performance in dollar terms.

The trend is not restricted to the Indian market alone. Global investors are facing a similar situation in other Asian markets as well, as the region’s currencies weaken against the dollar on concerns of rising inflation and higher import bills.

Depreciating currencies are a double whammy for dollar money invested in Asian emerging economies, as it trims effective returns in an already volatile market.

The Sensex, for example, has declined 14 per cent since the beginning of the year. In dollar terms, however, the Sensex has shed as much as 21 per cent, with the rupee dropping by about 7 per cent since January.

Other Asian currencies such as the South Korean won, the Malaysian ringgit and the Thai baht have also depreciated sharply against the dollar over the past month. This has begun to affect the dollar returns in those markets as well. The decline of the South Korean won has pruned the KOSPI’s monthly return of 6.6 per cent to a mere 2.8 per cent on a dollar basis.

A similar disparity in monthly returns has been witnessed in Pakistan, Indonesia, New Zealand, Malaysia, Thailand and the Philippines.

While the Asian growth story has attracted massive fund flows into the region, the negative outlook for the dollar has also been a factor behind allocations to the region in recent times.

Investors who have been betting against the dollar have been investing in Asian markets, expecting the region’s currencies to appreciate against the greenback and boost their portfolio returns.

The bet on the Indian rupee certainly paid off in 2007. The Sensex rose 45 per cent last year, but FIIs saw their portfolio value appreciate as much as 63 per cent on the back of the rupee’s rise against the dollar. The trend has now begun to reverse.

If the outlook for Asian currencies weakens further, foreign investors might consider revising their portfolio allocations to these markets.

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