Hedge, index funds have turned heavy sellers since August.
Stop-losses of several India-focused hedge funds and index funds have been triggered, as a sharp fall in the rupee against the dollar this month exacerbated their portfolio losses.
The Indian currency has depreciated 8.55 per cent in this month against the greenback, according to data compiled by the Business Standard Research Bureau. On Thursday, it slid 2.4 per cent to 49.54 per dollar, the lowest level in 28 months, as global risk aversion prompted investors to move into safer assets like the dollar and debt.
The Bombay Stock Exchange (BSE) benchmark, the Sensex, which closed at 16,361 yesterday, has remained flat this month so far. However, the Dollex-30, which measures the Sensex’s returns in dollar terms, has fallen 6.5 per cent, thanks to the depreciating rupee.
“Most investors, not just in the equity markets but across financial markets, have been caught a little unawares by the sharp depreciation of the rupee,” said the head of India research at a foreign brokerage. “Amongst peer groups, we are one of the few current account-deficit markets. At the same time, globally, risk sentiment is weak, so it’s not that investment flows are compensating for this in any way.”
After Standard & Poor’s downgrade of the US government’s AAA-credit rating on August 2, the rupee has depreciated 12.48 per cent against the dollar. The Sensex has declined 10.66 per cent since then, while the Dollex-30 has lost nearly 20 per cent.
"On the face of it, there is nothing to suggest for (why) this kind of rupee depreciation against the dollar. Last month, when there was outflow from FIIs (foreign institutional investors), the rupee had held up quite well. In this month, there is net inflow so far, but the currency has depreciated so much, despite export growth being strong," said U R Bhat, managing director at Dalton Capital Advisors (India). “FIIs look at return in their home currency. So, they are certainly concerned.”
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No wonder, hedge funds and index funds have been heavy sellers of Indian shares since August. A little over 60 per cent of foreign institutional investor (FII) selling in Indian shares on Thursday came from these investors, brokers say. FIIs sold shares worth Rs 1,305 crore on Thursday, according to provisional data on the BSE website.
For a fund managing $1 billion in India stocks, the fall in rupee value has meant a blow of Rs 600-700 crore since August.
On the other hand, while a fall in the rupee may hurt existing investments, it may also give impetus for fresh investments, since funds will be able to buy more stocks with less dollars. This happened during May 2008, when the spot rupee fell 4.5 per cent in a fortnight and FIIs had pumped in a little over Rs 700 crore. This saw the BSE Sensex moving up by 600 points to 17,350 on May 19, 2008.
"While such a sharp depreciation in the rupee is giving jitters to FII traders in the current scenario, in the next few weeks, more leveraged money may also flow into India for the same reason that the rupee has crashed against the dollar," said an overseas fund manager.