Weak rupee dented dollar returns for already wary foreign investors in 2024

Experts said the impact of the weaker rupee on FPI dollar returns could persist this year. (Reuters)
Experts said the impact of the weaker rupee on FPI dollar returns could persist this year. (Reuters)

Summary

  • In 2024, the weaker rupee diminished dollar returns for foreign portfolio investors, with the BSE Dollex 30 yielding only 5%. Despite RBI support, concerns remain over sustained FPI outflows as US bond yields stay elevated.

The continuing slide of the rupee against the dollar has significantly hit the dollar returns of foreign portfolio investors (FPIs) in India, which could further dampen foreign inflows into Indian shares. This has happened in the backdrop of the rupee being among the least affected global currencies to the appreciating greenback.

The BSE Dollex 30, the dollar equivalent of the bellwether Sensex 30, has underperformed the benchmark index, returning 5% (to last year’s closing of 7,126.68 on 31 December) compared to the Sensex’s 8.16% (closing of 78,139.01), data from the BSE showed.

“Global investor returns are indexed to the dollar and, thus, the fall in rupee last year has impinged on their dollar returns," said Ashish Gupta, chief investment officer at Axis Mutual Fund.

The rupee slipped 2.9% in 2024, from ₹83.23 to the dollar as of end-2023 to to ₹85.66 on 31 December last year. The slower fall relative to other currencies was backed by RBI selling dollar through spot, over-the-counter (OTC) forwards and non-deliverable forwards (NDF) markets.

Also read | Weak rupee a new worry for paint companies

Experts said the impact of the weaker rupee on FPI dollar returns could persist this year, with signals of greater protectionism by the incoming Donald Trump-led administration keeping US bond yields elevated, in turn, fuelling higher FPI outflows. The yield on the US 10-year paper rose from 3.7% on 18 September 2024 to 4.57% on 31 December.

Gupta believes significant foreign inflows into Indian shares are unlikely with the US 10-year bond yield remaining elevated at over 4.5%. “Foreign investors in both Indian debt and equity would prefer the safety of the US dollar relative to Indian stocks or bonds and this could exert downward pressure on the rupee," he said.

To be sure, RBI’s interventions have kept the rupee’s decline significantly lower and more orderly than the depreciation of other dollar pairs like the South Korean won (-13.8%), Russian rouble (-18%), and Turkish lira and Brazilian real, which plumbed 20% each.

The domestic surge

FPIs net invested a mere ₹427 crore in Indian shares last year, hitting almost rock bottom from ₹1.7 trillion in 2023, per data from NSDL (National Securities Depository Limited).

The only reason Indian markets held up was because of the heavy retail investments through mutual funds (MFs).

Last year, domestic institutional investors (DIIs, which include MFs, insurers, banks, pension funds, etc.) net purchased a record ₹5.26 trillion worth of shares, a whopping 184% rise from ₹1.85 trillion in 2023.

Also read | Sensex, Nifty down 1.3% as weak rupee spark FPI selling

Prior to the pandemic, FPI selling would drag down Indian markets and the reduced valuations would cause them to invest again. However, since DIIs have become an “effective bulwark" against FPI selling, the markets haven’t fallen and valuations aren’t compelling for FPIs even now, explained Anindya Banerjee, senior vice-president (currencies & commodities) at Kotak Securities.

Where the rupee is headed

Banerjee expects the rupee to test 87 to the dollar by March. “The depreciation would be gradual, thanks to the RBI intervention across the spot and onshore and offshore forward markets," said Banerjee.

At the same time, he added that this could further reduce the dollar returns from FPIs’ investments in Indian shares.

Madan Sabnavis, chief economist at Bank of Baroda, expects the rupee to trade in a range of 85.5-86.5 to the dollar through the first quarter of the current calendar year.

And read | Mint Primer | Rupee takes a dive, more turbulence in 2025

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