Low dollar returns add to FPIs' woes; Dollex up just 39.8% since March 2014

Dollex shows more pain for foreign funds amid depreciating currency

The Sensex has risen 67.3 per cent since March 2014. The Dollex — which measures Sensex returns in dollar terms — has risen just 39.8 per cent.

The fall in the rupee, from 59.89 in March 2014 to its current levels of 71.77, has taken away much of the gains that foreign investors would have otherwise made. In fact, dollar returns over the longer term are even more abysmal.  

The Dollex is currently trading at 1.8 per cent lower than its pre-2008 crisis high. The rupee was then trading at under forty against the dollar.

Experts feel strong structural reforms may well be required to help bring in FPIs, even as global risk aversion is a major headwind.

FPIs typically make allowances for 5-6 per cent yearly depreciation in the currency, according to U R Bhat, director at Dalton Capital Advisors (India). They require rupee returns upwards of 10 per cent for India to look attractive, relative to other investment options.

Emerging markets see limited interest overall during periods of risk-off trades. The current environment doesn’t bode well for risk-taking in light of geo-political factors, such as trade wars and issues surrounding Iran. However, substantial reforms may help India’s relative appeal, says Bhat.

“People are looking for structural changes that can take the market dramatically higher,” he said.

Some factors are in India’s favour. Crude oil prices, for example, have been benign, noted Amnish Aggarwal, head (research) at Prabhudas Lilladher. India relies on imports for most of its crude oil requirement. Any fall in crude prices reduces pressure on the rupee.

Brent crude prices have been hovering around the $60-per-barrel mark, on the back of weak global economic outlook. Any fall in the currency would, however, be negative for foreign investors. “It reduces their return further,” Bhat said.

The Sensex has dropped 5.2 per cent since the Budget on July 5. The Dollex is down 9.5 per cent. A depreciation in the rupee, even as foreign investors exit, has resulted in the sharply lower dollar returns.

Introduction of the surcharge on FPIs took the effective tax rate to 42.7 per cent, at its highest. This was later reversed last week in an announcement by the Finance Minister, among a series of steps to revive the economy.

Jefferies, in its August 25 strategy note, stated that it was encouraging to see the Centre engage on issues related to the slowdown. However, it remained cautious on the market.  

“…fiscal constraints preclude any meaningful stimulus, prompting us to stay cautious amid soft earnings and extended valuations,” said the report authored by equity analysts Somshankar Sinha, Piyush Nahar, and Pratik Chaudhuri.

Jefferies had cut its earnings forecasts for FY20 by 7 per cent, following weak numbers in the June quarter. It had also cut earnings forecasts for the next financial year by around 4 per cent.  

FPIs have been net sellers by close to $3 billion, since the budget in July.