Rupee conundrum: Foreign investment outflow boosts USD

Indian markets -- debt and equity -- have recorded its highest outflow of foreign investments in first seven months of any calender year during 2018, propelling a major slide in the rupee.

As rupee traded at 70.56 against US dollar on Wednesday, the currency has depreciated around 7.1% in 2018 so far, from Rs 65.86, on January 1, 2018.

According to the data available with National Securities Depository Limited (NSDL), the country has seen a net outflow of Rs 37,583 crore by foreign institutional investors (FIIs) and foreign portfolio investors (FPIs).

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The debt market has seen the highest outflow of the amount, of Rs 36,120 crore. Experts suggest that the interest rate differential with the United States has propelled the outflow.

On June 14, the Federal Reserve Board had approved of increasing the discount rate (the primary credit rate) at the Bank from 2.25% to 2.5% with immediate effect. Owing to this, the markets saw an outflow of Rs 10,970 crore in the markets by FIIs and FPIs.

However, as the Reserve Bank of India (RBI) hiked its repo rate on inflation concerns, the debt markets have seen an inflow worth Rs 5,272 crore.

Experts suggest that the RBI might go ahead with a rate hike in case the rupee slide continues, owing to the global woes.

"We might see a rate hike in the coming monetary panel committee (MPC), and RBI governor has been hinting towards it, as well," Vice-president -Equity Advisory Group, Motilal Oswal Securities said.

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On the equity front, the Indian markets have seen an outflow amounting Rs 1,387 crore by the FIIs and the FPIs, as per data available with the NSDL, mostly due to the bull in the US markets.

"US markets were doing far better in past months. So investors parked their monies in US markets, rather than Indian markets," Shah added.

In the past one year, Nasdaq Composite Index has jumped by 24.3%, compared with a jump of 15.5% in the NSE's Nifty50 index in the same period.

But on the silver lining, the domestic institutional investors (DIIs) have added Rs 66,709.67 crore to the Indian markets, that has prevented the large-cap indices -- BSE Sensex and NSE Nifty50 -- from sliding. "There has been an increasing channelling of savings towards the Indian markets," Shah added.

Last time, in 2008, the country had seen the net outflow of FIIs and FPIs, owing to the global recession. The country had seen an outflow of Rs 41,215.5 crore during the full year. However, in 2008, debt markets saw a net inflow of FIIs and FPIs worth Rs 11,771.6 crore, while the equity markets were hit by an outflow amounting to Rs 52,987 crore.

However, in terms of FIIs in the equity market alone, despite being in the negative territory, the performance has been better than 2011 and 2008 (full year numbers). The FII outflow from equities till August 13 this year stood at Rs 75.5 crore, as per the data compiled by Dhirendra Kumar, CEO, Value Research. In the current calendar year, the gross purchases by FIIs in the Indian equities stood at Rs 8,49,703.29 crore, as against the gross sale amounting to Rs 8,49,778.79 crore.