Rising dollar: FPI investment set to turn negative in September

Experts say EM market equities, currencies may remain weak unless there is positive news

The spike in the dollar has taken some zing out of emerging markets (EMs) in September. The dollar index, a gauge for the performance of the greenback against major global currencies, is hovering around its two-month low amid uncertainty over further stimulus measures in the US and rising Covid-19 cases worldwide. 

While the domestic equity markets have seen a sharp rebound in the past two trading sessions, analysts say the dollar’s ascent could be a cause for worry as it could further accelerate foreign portfolio investor (FPI) outflows. In the past six trading sessions, the overseas investor selling has topped the Rs 10,000-mark ($1.35 billion). The FPI monthly investment tally is expected to turn negative in September for the first time in four months, unless there is a sharp reversal in flows in the remaining two trading sessions.

Experts said the rising dollar is a sign that investors have turned risk-averse.

“India was one of the few emerging markets which attracted foreign investor flows in the previous months. But the rise in Covid-19 cases across the globe, especially a second wave of infection in Europe, led to a slowdown in economic recovery. Also, the stalemate in the US regarding the stimulus package led to the risk-off selling by foreign investors in September. The dollar became a safe haven. We may not be seeing too much flow because the risk-off (sentiment) may stay as the US elections approach," said Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies.

Experts say EM market equities and currencies may remain weak unless there is some positive newsflow pertaining to vaccines, new stimulus packages, and positive economic data.

“A stimulus package by the US government could give a fillip to the markets, and that could translate into some flows to India. Investors will be keenly watching how good the September quarter results are; the initial indications are that manufacturing companies have started doing well. Services companies are in good shape. That may give some confidence to investors. A stimulus package by the Government of India can also boost investor sentiment. The government has tried to do everything it can without jeopardising fiscal deficit. Now it has realised that the economy needs something better. The last stimulus announcement was not a fiscal push; it was mostly directed at lending through banks,” said U R Bhat, director, Dalton Capital (India).

Not just India, but almost all EMs have witnessed capital outflows in September. EM peers, such as Indonesia, South Korea, Brazil, and Taiwan, have seen sharper outflows than India. Also, most EMs are down between 2 per cent and 5 per cent, so far, this month.