Foreign Institutional Investors (FIIs) got ‘less bang for their buck’ this time around than they did during earlier bull runs. Sure, they made good money in 2012, thanks to the market’s strong run. But they made less than what Indian investors did because of a weaker rupee that eroded some of their gains.
Consider this: The Sensex rose 25.8 per cent in 2012 while the Dollex 30 (the dollar-denominated version of the Sensex) gained 22.2 per cent, a good 3.6 percentage points less than the domestic benchmark’s return.
In the bull runs over the last seven years, the situation was reversed. Returns on the Dollex 30 beat the Sensex comfortably — in one instance (in 2007) by as much as 18.2 percentage points.
Rupee effect
The joker in the pack was the rupee. Its movement against the dollar determined when foreign investors gained more or less through stock market investments than domestic investors.
In 2012, despite FIIs pouring $24 billion into the Indian equity market, the rupee still lost 3.1 per cent against the dollar. This chipped away at the gains of the Dollex 30.
A weak rupee vis-a-vis the dollar erodes the returns that foreign investors make in Indian markets. In earlier years, large FII flows has given the rupee a leg up.
For instance, in 2007, FIIs invested $18.3 billion in Indian equities and the rupee appreciated 12.3 per cent against the dollar. As a result, the Dollex 30 gained 65.3 per cent much more than the Sensex appreciation of 47.1 per cent.
But this year, the second-largest FII flow in seven years failed to boost the rupee. This resulted in the Dollex 30 returns trailing that of the Sensex.
Clearly, such major factors as India’s weak economic growth, high inflation and galloping deficits overshadowed FII optimism. Did the rupee’s weakness help Indian investors who bought equity funds abroad? No, it appears, for international funds that invest in stocks listed overseas delivered a mere 14 per cent return in 2012 despite the dollar’s strength, against the Sensex return of 26 per cent.