Rupee Effect: Stable currency retains FIIs’ interest in India

It is a well-established fact that FIIs’ money has powered the recent rally in India’s stock markets.
rupee dollar

Mumbai: After receiving over $22 billion FII inflows in 2020, India still holds its attraction for foreign investors as the rupee plays a supporting role.

The global liquidity conditions, zest for a return and fast recovery might have been the initial triggers for FIIs’ interest, while the real sustenance for such a trend has also been credited to a stable and relatively weak rupee in the Covid-19 period.

As such, the rupee has been a laggard in 2020, depreciating by 3.10 per cent.

Market watchers have blamed India’s interest rates, high inflation and Reserve Bank’s market interventions to have weakened the rupee despite a massive inflow of direct and market-linked foreign investments during the pandemic-impacted year.

Notably, the RBI’s role in keeping the currency’s appreciation in check has been pointed out by the experts. Recently, the Reserve Bank was called out by the US Treasury Department to curtail its market activities.

The Reserve Bank is known to enter the markets via intermediaries to either sell or buy US dollars to keep the rupee in a stable orbit. Consequently, RBI’s alleged actions not only made India’s exports attractive, but also its equities.

“Intervention by the RBI has helped rupee remain firm, staving off pressure of appreciation due to the continuing inflows from FPI and FDI,” said Deepak Jasani, Head of Retail Research at HDFC Securities.

“A stable rupee gives consolation to FPIs to invest in any country. However, existing FPI investors would have benefited more if the rupee had appreciated as their dollar value of holdings would go up in that case. For new investments, the fact that the rupee has not appreciated is a positive,” Jasani added.

It is a well-established fact that FIIs’ money has powered the recent rally in India’s stock markets.

“A stable rupee does help to an extent in attracting FIIs and maintaining their interest. However, some appreciation would have made their investments more valuable during this time,” said Siddhartha Khemka, Head of Retail Research, Motilal Oswal Financial Services.

In fact, not just equities’ value, but India’s forex reserves also grew due to the RBI’s interventions. Subsequently, India’s forex reserves swelled up by $123.66 billion to $581.13 billion in the last calendar year.

“Stability of rupee certainly is an important factor in FII inflows,” said V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

“This stability is the consequence of two factors declining the dollar, which, in turn, is the consequence of unprecedented huge dollar printing by the US Fed and secondly, RBI’ s exchange rate management by buying dollars from the market to keep the rupee stable. Certainly, the RBI has played an important role in keeping the rupee stable and FII inflows buoyant,” Vijayakumar added.

According to Gaurav Garg, Head of Research, CapitalVia Global Research: “Apart from factors like abundant liquidity and attractive valuations, the strength of Indian Rupee over the US Dollar has played a significant role in driving investments into Indian equities.

“There has been a shift in money towards emerging markets, especially India, given their interest rates are at the lower end and the inflation-adjusted return is much higher. The loosened Monetary policy and initiatives taken by the Indian government have added fuel to the fire and added further strength to the markets.”

(Rohit Vaid can be contacted at [email protected])

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