Weaker rupee dents FPI returns; JP Morgan bond index inclusion offers hope

There is, however, optimism for FY25 with anticipated inflows of $20 billion to $30 billion into government bonds, following India’s inclusion in the JP Morgan Global Bond Index.

Although the benchmark 30-stock Sensex delivered a 4.5% return in 2022 and continues its trend this year, its dollar-adjusted version, the Dollex 30, turned in a negative 6% last year, settling at a modest 3.85% so far this year. The Dollex represents the Sensex’s returns adjusted for dollar value, indicating that FPIs see diminished returns when the rupee weakens, and vice versa.

According to market veteran Shankar Sharma, founder of GQuant Investech, the sharp depreciation of the rupee over the past two years is one of the “main reasons” for foreign money outflows, with underperformance from major companies like Reliance Industries, HDFC Bank, Infosys, and TCS also contributing and affecting overall market sentiment.

In the past two years through October 2023, Reliance Industries’ shares have been flat at around ₹2,300, HDFC Bank has fallen almost 7% , Infosys has seen a decline of 18%, while the TCS stock dropped 10%.

“The Dollex returns clearly show that the weaker rupee has played spoil-sport,” said Sharma. “While India is in a relatively sweeter spot than other EMs, the fact also is that many large-caps have hardly moved over the past two years and while the mid-caps and small-caps have outperformed this year, their volatile nature leaves little room for FPIs to manoeuvre in .”

“The rupee can continue to remain under pressure if the Fed hikes the FFR (Fed Funds Rate) to rein in inflation in December or if crude tests the $100/barrel mark on worsening hostilities in West Asia,” he added.

The worst dollar-adjusted returns are generated in years of a steeper fall in the rupee. For instance, an 11% depreciation in the local unit to 82.72 to a dollar in 2022 from 74.47 in the past year caused the Dollex to fall 6.32% to 6,037 even as the Sensex rose 4.4% to 60,841 .

Rohit Srivastava, founder of IndiaCharts and Strike Money Analytics, agreed that weaker dollar returns have been the key reason for FPIs selling in the cash market since 2021. This doesn’t include their investments in the primary market.

Data from Strike Money indicates that FPIs have been selling shares on National Stock Exchange’s secondary market consistently for almost three years, with significant outflows worth ₹91,951 crore in calendar 2021, ₹2.78 trillion in 2022, and ₹52,346 crore so far this year.

Economists highlight the unpredictability of the rupee’s direction, considering factors like geopolitical tensions and rising US bond yields. 

Crisil’s chief economist, DK Joshi, maintains an 83 to a dollar outlook by March, expecting the local currency to dip to as low as 84, given current geopolitical issues and rising US bond yields. However, he forecasts that the rupee could stabilize at 83 by the fiscal year-end, boosted by the expected inflows from the JP Morgan Bond Index. He expects inflows of around $30 billion into India’s debt market over 10 months in FY25.

“There is likely to be some pre-positioning by March before the inflows due to the bond inclusion actually commence from around June over the next ten months,” said Joshi . “That is why I am retaining my target at 83 to the USD by March.”

The rupee ended 2 paise higher at 83.26 against the US dollar on Thursday.

FPIs were net sellers in the capital markets on Wednesday, offloading shares worth ₹1,816.91 crore.

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Updated: 02 Nov 2023, 09:58 PM IST