Mumbai: Foreign investors now have another big reason to invest in Indian stocks apart from the 8% growth rate of the Indian economy over the past three years: the appreciating rupee. The rupee hasn’t just risen against the dollar, but also against currencies of other emerging markets. As a result, returns from the Indian stock markets in dollar terms are higher than returns from other regional markets (in dollar terms). They are also higher than returns in rupee terms.
Between 1 April and 7 May, the Morgan Stanley Capital Index (MSCI) for the Indian market is up 13.47% in dollar terms, although it has risen by a comparatively modest 6.7% in local currency terms.
Thus, foreign investors putting their money on the MSCI India basket of stocks have seen their holdings appreciate by 13.47%, partly because the price of these stocks has moved up, but mainly because the rupee has appreciated sharply against the dollar over the period.
The MSCI global equity benchmark, launched some 35 years back, is one of the global indices used by investors to make decisions.
In dollar terms, the MSCI India index for the current quarter has also outperformed the MSCI Emerging Markets index as well as the MSCI Asia index.
The MSCI India index has also performed far better in the current quarter than for the year as a whole.
The data shows that the year-to-date returns for the MSCI India index have been a dismal 0.98%, compared with a return of 7.59% for the MSCI Emerging Markets index.
But the Indian market has turned around since April, which is why the performance in the current quarter is much better. Quarter-to-date returns for MSCI India index are still lower than most other markets in the region, but the Indian market has been able to outperform the emerging markets universe.
The sharp appreciation of the rupee, if it continues, could lead to higher inflows from foreign investors into India.
“The weakening dollar is certain to drive outflows to emerging markets, including India. And with the authorities unwilling to take steps to curtail rupee appreciation because of their concern with inflation, FII (foreign institutional investors) inflows should increase,” said Amitabh Chakraborty, president (equities) at Religare Securities.
Analysts point out that the weaker dollar played a major role in pushing up asset prices in emerging markets during 2003-05. The appreciation in the local currency added that extra bit to returns from emerging markets.
Currency appreciation is also an incentive for the “carry trade”, where speculators borrow in markets and currencies that have low interest rates, such as the Japanese yen, and invest either in markets with higher interest rates or in currencies prone to appreciation.