yebrows have been raised on the Street over the colour of money that has been flooding the market since September. While some believe that it could be black money finding its way back through P-Notes, there are quite a few believers who see the flows as a vote of confidence for the slew of reforms that the UPA government has taken. While the debate is far from conclusive, if one were to assume that all the money has come in from genuine foreign institutional investors then they have surely made a killing on their investments.
Between June 27 — when the rupee first slid to an all-time low of 57 this year against the dollar, on account of the yawning trade deficit, heightened demand for dollars, and rising price of crude — and September 18, when it clawed back to a more respectable 53, FIIs invested #29,018.4 crore. And going by the Dollex 30, a Bombay Stock Exchange index that reflects the value of the Sensex in dollar terms, foreign investors made good return on their investments. The Dollex 30 has risen by nearly 22% from 2,436.89 on June 27 to 2,965.54 as of October 3. As Kalpesh Kinariwala, founder and CEO, Capveda Capital India, puts it, “FIIs have got more bang for their buck, what with the benchmark index and currency rising in tandem.”
It’s not just equity that has provided fertile ground. The uncertainty over the Eurozone situation and prolonged sluggish growth in the US has prompted capital to move to India in search of better returns. In India, bonds have rallied by 5-7% making investment in debt attractive as well, according to Kinariwala. While FIIs invested #93,316 crore in equities during the year, the amount stood at #26,788 crore for debt market inflows.
After the rupee appreciation too, the markets have proved to be a happy hunting ground for FIIs. From September 18 till October 17, FIIs invested a net #22,599 crore.
Abhay Laijawala, head of research, Deutsche Equities India, points out, “The government’s effort to kickstart reforms has caught the eye of investors.” While that could be partly true, the liquidity surge can also be attributed to the fresh round of quantitative easing kicked off by the US Federal Reserve.
Since October 3, though the rupee has lost ground and is now around 53 levels and the Dollex 30, too, has come off to 2,891 points, consensus on the Street is that the currency could rise to the level of 49 to 51 against the greenback by the end of the calendar year. But the million dollar question remains: over the past two years the rupee has caught consensus estimates by surprise, will it be any different this time around? And if the rupee indeed heads south, then the gains that the foreign institutional investors have made could well seem momentary.