FPIs in exit mode as weak rupee eats into returns

The steady weakening of the Indian rupee that has eroded dollar returns is a key trigger for foreign portfolio investors (FPIs) selling in India’s cash market in the past two years, market experts and economists said. A stronger dollar and costlier oil could make it worse, and some reprieve is likely only next financial year when India’s inclusion in the JP Morgan Global Bond Index attracts $20 billion-$30 billion to government bonds.

- Ram Sahgal

While the Sensex gave around 4.4% returns in 2022 and 5.32% so far this year, the Dollex 30—which captures the dollar-adjusted returns of the Sensex—turned in a negative 6% return last year and a relatively lower 4.68% so far this year. This means FPI returns underperform those of local investors when the rupee weakens and outperform them when it strengthens.

According to market veteran Shankar Sharma, founder of GQuant Investech, the sharp depreciation of the rupee over the past two years is one of the “main reasons" for foreign money outflows, the other being the poor performance by index heavyweights such as Reliance Industries, HDFC Bank, Infosys and Tata Consultancy Services in the past one year.