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Over the last few weeks, with increased trade tension between the US and China, and geopolitical concerns across the globe, the risk aversion in equity markets has sent Asian currencies into a tailspin. But contrary to common belief, the Indian rupee has not been battered as badly as other Asian or emerging market currencies. Sample this. The India rupee is down 1.82 per cent against the US dollar year-to-date. However, the Chinese Renminbi and Taiwanese Dollar are down over 2 per cent each against the greenback. The South Korean Won is down 8 per cent.
Looking at the chart of emerging market currencies, the picture gets more sombre. The Argentine Peso is down over 31 per cent to the US dollar, year-to-date. The South African Rand is down 6 per cent. Romanian Leu, Colombian Peso and Turkish Lira, are all down by about 5 per cent against the US dollar.
Aside from the good news that the rupee has not plunged as much as other currencies, Indian investors can also take comfort from the fact that Foreign Portfolio Investors (FPIs) may not push the panic button solely on account of a depreciating rupee (fall in rupee against the USD lowers their dollar returns). Past trends suggest that FPIs have taken a long term view on India equity and not pulled out money every time the rupee loses its value against the USD.
No direct link
Data compiled by BusinessLine from the year 2000, reveals no direct link between FPI flows and rupee movement.
Between 2000 and 2002, for instance, while rupee depreciated from 44.9 to 48.56, FPIs were net buyers in the equity market — with net inflows to the tune of Rs 21,969 crore. Between 2007 and 2009, again, when the Indian currency depreciated from 41.32 to 48.36 against the dollar, FPIs’ net investment in the equity market was over Rs 1 lakh crore. They were net buyers in the debt market, too, during this period. Similarly, between 2011 and 2013, while the rupee slumped from 46.67 to 58.6, the Indian equity market saw FPIs pumping in about Rs 2.3 lakh crore. Since 2014, again, the rupee has been only moving lower and lower against the USD. However, but for the year 2018, FPIs have only been net buyers in the equity market in all the years.
That said, given that earnings growth continues to be weak for India Inc, even in the quarter ended June 2019, one is not sure when the tide will turn.
Good news for some…
But a weak rupee is not bad news for everyone. Investors in gold and exporters of goods and services in the country see higher returns in times of rupee depreciation. For exporters, a weak rupee increases competitiveness in global markets. In fact, Indian IT service providers are large beneficiaries of a falling rupee. In gold, too, investors benefit from a weak rupee. While the CAGR return of gold over 20 years in dollar terms is 9 per cent, for Indian investors, it has delivered a strong 12 per cent return.
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