With the US dollar strengthening due to the eurozone turbulence, the rupee is losing ground and foreign institutional investors (FIIs) are shifting their focus from emerging markets like India.
Analysts feel that the European debt crisis, which brought the euro to its lowest level in four years, coupled with a weak rupee, is leading to the FIIs cutting down their exposure in India. They are investing more in corporate and government bonds and gold in developed economies.
During the April-May period, the rupee has weakened by 3.5 per cent against the US dollar, while it had strengthened by 6.42 per cent against the euro in the same period.
"The Indian rupee continued its depreciation journey in the past fortnight as ongoing economic worries in the euro zone led to concern of another round of recession. Strength in the dollar index was another factor that affected gains in the Indian rupee," Angel Broking Head Commodities Research Amar Singh said.
"Capital outflows from the country led to major concern, as FII inflow was the major reason that led to gains in the currency in the early part of the year," he said.
The hardening of the dollar also resulted in foreign investors shifting their rupee-based investments to dollar-denominated assets. A rise in the dollar value against the rupee increases the borrowing cost for foreign investors, who had borrowed dollars to invest in Indian market.
As such, they prefer to exit their rupee investment at higher levels, pocketing the currency value differential along with portfolio gains, if any.
FIIs were net sellers of stocks worth $2 billion in May, leading to strengthening of the US dollar against the rupee.
"FIIs pulling out their money in the month of May led to a sharp depreciation in the rupee. The currency is expected to take cues from the economic situation on a global scale and the impact of FII outflow from the country," Singh said.
"Asian markets will now witness outflows as the impact of the eurozone debt crisis on the global economy is now being introspected. This will lead to strength in the dollar due to safe-haven demand," he added.
Gold prices zoomed past all previous records to a new peak of Rs 19,220 per ten grams on frantic buying after the metal surged to an all-time high in international markets.
Since last month, FIIs have invested a huge chunk of their money in the debt market by way of government and corporate bonds and debentures, while their interest in equities has largely turned negative.
