Sliding stocks and weak rupee, a double whammy for foreign portfolio investors

Lokeshwarri S K, Anand Kalyanaraman | Updated on October 05, 2018 Published on October 04, 2018

Relentless depreciation of the Indian currency has been impacting FPIs’ returns

While domestic investors would have been rattled by the 3.7 per cent decline in the Sensex over the last two sessions that has reduced the year-to-date returns to just 3 per cent, foreign investors would be in a more dire situation. For the steep erosion in the rupee has resulted in a loss of 10 per cent for FPIs in dollar terms.

The dollex index that translates the movement of the Sensex to US dollars is more relevant for foreign portfolio investors (FPIs) since the profit or loss that they repatriate out of India will eventually be affected by the exchange rate movement. For instance, suppose an FPI brings ₹50 lakh in to the country when the rupee was at 65 to the dollar. If he makes a profit of ₹5 lakh in a year, during which the rupee depreciates to ₹67, his return in rupee terms will be 10 per cent. But in dollar terms, it will be lower at 7 per cent due to rupee depreciation.

The rupee has been constantly depreciating over the past decade, thus impacting FPI returns. In the period between 2008 and 2018, rupee has depreciated in eight out of 11 years. But past data show that the link between FPI flows and rupee depreciation is quite weak.

Mild depreciation no big deal

But FPIs do not appear to be unduly worried about mild rupee depreciation of less than 5 per cent in a calendar year. For instance, rupee depreciated 4.7 per cent against the dollar in 2015. Foreign investors net purchased both equity and debt in that calendar year. Similarly, in 2016 and 2012, the rupee recorded mild depreciation, but FPIs continued to be net buyers. In periods of sharp depreciation too, when the rupee lost over 10 per cent against the greenback, there has been no significant reaction from FPIs. Foreign investors have resorted to selling both equity as well as debt in 2018, when a 13 per cent fall in the rupee is resulting in FPIs pulling out $2.26 billion from equity and $7.27 billion out of debt investments. But in 2013, when the currency depreciated 11 per cent, they net purchased $19.7 billion from the equity market while turning net sellers in debt. In 2011, when the rupee declined 15.7 per cent, there was mild selling in equity and FPIs were net buyers in debt securities. In 2008, however, the sharp fall in the rupee at 19.24 per cent was partly due to FPIs pulling out $12.9 billion from Indian markets.

Thumbs up to a strong rupee

While FPIs seem to be indifferent to a falling rupee, they seem to like a strong rupee.

They have brought in more money in both equity and debt in the years when the rupee has strengthened. This was seen in 2017, 2010 and 2009.

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Published on October 04, 2018
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