Rupee fall keeps FIIs at bay

To invest or not to invest? It is a Catch-22 situation for foreign institutional investors (FIIs) playing Indian markets. Even while stock markets are trading at attractive valuations, a sharper-than-expected slide in the rupee against the US dollar is keeping them away, say analysts.

Usually, FIIs would like to bring much of their money in India in a situation where the rupee is trading at an all-time low against the dollar and benchmark equity indices are at a 30-month low in dollar terms.

FIIs stand to make decent returns on their investment in these conditions in case of a short rally in the currency, even if their bet on stocks was not all that good.

For instance, FIIs got richer riding on the back of the rally in rupee between August and September 2007. Those who invested $100 in the Indian markets during this time made a clear $102.89 without any major market risk.

The rupee had witnessed a runaway rally during this period to close at Rs 39.89, a nine-year high against the greenback and appreciated by 2.86 per cent in around 15 days.

However, the current situation has put dollar investors in a dilemma. For a fund managing $1 billion in India stocks, the fall in rupee value has meant a blow of over Rs 1,500 crore (Rs 15 billion) since August this year, merely due to currency depreciation.

The Rupee has depreciated around 18 per cent against the dollar in the past five months and fell below its all time low of 54p

against the dollar on Thursday.

There is no bottom in sight and the weakness was accentuating in the absence of clear signals from the government and the central bank on safeguarding the currency.

The rupee, one of the worst performing currencies globally, "is acting as an irritant and a deterrent for FII fund flows in the country," says Saurabh Mukherjea, head of equities at Ambit Capital.

In dollar terms, the key benchmark indices, the BSE Sensex and S&P CNX Nifty of the National Stock Exchange are trading near their 30 month low, a level seen just a few months after US investment bank Lehman Brother went bust leading to a freeze in global trade and transactions.

"The FIIs want to invest, but fear a further slide in the rupee given the lack of fiscal prudence in India, unlike China," says Sudip Bandyopadhyay, the managing director of Mumbai-based broking firm Destimoney Securities.

Bandyopadhyay, who returned last week after meeting a host of fund managers in Europe, says investors were keenly awaiting a signal from the Reserve Bank of India to know where the fall in rupee would halt.

"Fund managers," he adds, "would like to invest in India in the current situation, as they stand to make decent returns on the back of a pullback in the currency value. All they need to understand is where the rupee slide stops."