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-share Sensex delivered a 4.5% return in 2022 and continues its trend this year, its dollar-adjusted version, the Dollex 30, turned in negative 6% last year, settling at a modest 3.85% so far this year. . The Dollex represents the Sensex 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 currency outflows, with major companies such as Reliance Industries, HDFC Bank, Infosys, and TCS also underperforming. contributing to and influencing overall market sentiment.
In the last two years to October 2023, Reliance Industries shares have been flat all around ₹2,300, HDFC Bank fell almost 7%, Infosys saw a decline of 18%, while the TCS stock fell 10%.
“Dollex’s returns clearly show that the weaker rupee has played a ruinous sport,” Sharma said. “Although India is in a relatively sweeter spot than other EMs, the fact is also that many large-caps have hardly moved over the last two years and while the mid-caps and small-caps have outperformed this year, their volatile nature leaves little. room for FPIs to maneuver in.”
“The rupee may continue to remain under pressure if the Fed raises the FFR (Fed Funds Rate) to curb 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 steeper fall in the rupee. For example, an 11% depreciation in the local unit to 82.72 to the dollar in 2022 from 74.47 last 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 performance was the key reason for selling by FPIs in the cash market from 2021. This does not include their investments in the mainstream market.
Strike Money data indicates that FPIs have sold shares on the National Stock Exchange’s secondary market consistently for nearly three years, with significant outflows in value. ₹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, given factors such as geopolitical tensions and rising US bond yields.
Crisil chief economist DK Joshi maintains an outlook of 83 to the dollar by March, expecting the local currency to drop to 84, given current geopolitical issues and rising US bond yields. However, he predicts that the rupee could stabilize at 83 by the fiscal year, 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 kick in from around June for the next ten months,” Joshi said. “That’s why I maintain 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 stocks ₹1,816.91 crores.