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Lokeshwarri S.K

If the year-end rally has made the domestic equity investors cheerful, foreign institutional investors (FII) have a greater reason to celebrate.

They have made far greater returns in December than local investors, thanks to the rapid appreciation in the rupee. It is, therefore, not surprising that they have turned net buyers in Indian stocks in December.

There has been a reduction in volatility in stock markets since the beginning of this month as the stimulus packages and rate cuts in India and elsewhere calmed investors and spurred some value buying. The Indian benchmark index, Sensex, has gained 14 per cent so far this month.

FIIs are, however, likely to have gained more, as their returns have been enhanced by the 6 per cent appreciation in rupee. The gains for Sensex in dollar terms this month (as measured by the Dollex) was an impressive 21.7 per cent!

The Indian currency unit was tottering on the brink of a precipice, at Rs 50.5 to the dollar, even as late as December 2. But it reversed direction to rally to Rs 46.7 in the next three weeks.

The change in fortunes for the rupee can be traced to the dollar losing its haven status and depreciating sharply, against all major currencies. The dollar index, which tracks the dollar movement against six major currencies, has dropped 9 per cent since the beginning of this month.

This means that it has already ceded half its 2008 gains. The ostensible reasons for the sudden decline in dollar are concerns over funding of the large stimulus package announced by the US President-elect, Mr Barack Obama, and the Federal Reserve cutting the target range for federal funds between zero and 0.25 per cent.

Dollar depreciation is beneficial for Indian equities in more ways than one. It reduces returns on dollar-denominated assets.

For much of 2008, global investors have been making a beeline for US money market funds and treasury bonds, as the steadily appreciating dollar was perceived as a ‘safe haven’. But now, with the dollar backtracking, these investors may be forced to seek avenues elsewhere.

The appreciation in the rupee may also prompt foreign investors to take a more favourable view of Indian stocks. One of the reasons for the exodus of foreign funds out of India was the concern about a rapidly depreciating currency widening the losses on their stock holdings.

More Stories on : Forex | Foreign Institutional Investors

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