Foreign investors rake it in as the rupee appreciates

Both foreign and domestic investors have made strong gains in the Indian equity market this calendar as stocks spiralled up.

But the returns of foreign investors have been higher than their domestic counterparts, thanks to the rupee’s appreciation against the dollar.

Since foreign investors ultimately repatriate profits to their home-countries, currency movement tends to affect their returns as well. Actual returns made by foreign investors can be measured with the Dollex 30, which is the dollar-denominated version of the Sensex.

While the Sensex is up 17 per cent (year-to-date), the Dollex 30 has surged 24 per cent so far this year.

The rupee’s 5 per cent (year-to-date) appreciation helped the Dollex 30 in 2017. The Indian currency, which was stuck in the broad 66-69 range against the dollar all through 2016, broke out in March, thanks to the resounding victory of the BJP in the Assembly elections.

This break took the currency to a 20-month high of 63.93 in April. The Sensex has also breached the psychological 30,000 level and has been rising to record highs since then. But the Dollex 30’s rally since the State elections has been sharper; about 12 per cent compared to the Sensex’ 8 per cent return over the same period.

Now, how does an FPI (foreign portfolio investor) gain from currency appreciation? Suppose an FPI invests $100 by buying 100 shares of XYZ Company at ₹68 a share when the exchange rate is also ₹68 to a dollar. He, therefore, invests ₹6,800 (₹68x100 shares).

If the share price goes up to, say, ₹75 over a period, he earns a return of 10.3 per cent as his investment value becomes ₹7,500 (₹75 x 100 shares). At the same time, if the rupee has also appreciated to, say, 64 over the same period of time, the dollar investment would have become $117.2 (₹7,500/64), earning a much higher return of 17.2 per cent in dollar terms.

The inverse is, however, true when the rupee depreciates as foreign investors tend to lose money. For instance, between end-May 2014 and February 2016, when the rupee plummeted 15 per cent from around 58 to 68 against the dollar, the Sensex fell 6 per cent whereas the Dollex 30 slumped by 20 per cent.

Similarly, between October 2012 and August 2013, when the rupee tumbled from 52 to 66, the Sensex lost just 2 per cent. But the 21 per cent fall in the currency value dragged the Dollex 30 by a whopping 23 per cent hitting FPIs badly.

An analysis of different legs of the rupee-dollar moves (both up and down) shows that the Dollex index is worst hit when the domestic currency depreciates sharply against the greenback.

The additional gains due to rupee appreciation has not gone unnoticed, for FPIs have been pumping record amounts into the Indian market this calendar.

FPIs have net purchased (up to June 9) $12.41 billion of Indian debt and $7.57 billion of equity.

A study on data available since 2002 indicates that the $12.41 billion inflow into the debt segment has been the highest ever for the January 1 to June 9 period. Since investors in debt have a shorter investment horizon, they tend to be influenced more by rupee movements.

If this trend in fund flows continues for the rest of the year, then there is a high possibility of the flows either touching or even surpassing the all-time high of $26.24 billion witnessed for the full year in 2014.