Foreign institutional investors (FIIs), who watched helplessly as a wilting rupee eroded their portfolios last year, now have something to cheer about. Even as the Sensex has staged a sensational rally this year, the strengthening rupee has boosted the value of their portfolios.
January saw the benchmark 30-share Sensex set a record of sorts; the bellwether gained more than 11%, making it the best January in 18 years. The rise was also the best monthly gain since September 2010.
Since January, the Sensex has now put on 14% in rupee terms. But for FIIs, the rewards have been bigger because the Indian currency rebounded sharply last month, posting its largest monthly gain in nearly 17 years. The rupee rose 7.45% in January against the dollar, following a 16% fall in 2011 that made it Asia’s worst performer last year. On Friday, the rupee touched 48.67, the strongest level in three months and has now put on 9% in 2012.
According to data available with Sebi, FIIs have been buyers of Indian shares worth more than $2. 04 billion in January, after selling stocks worth around $500 million last year. The bigger investment was, however, made in the Indian debt market where they picked up bonds of more than $3.04 billion. In the first three trading sessions of February, FIIs have bought close to $1 billion worth of equities and invested $120.13 million in bonds.
Not everyone is sure the rally will sustain. In a recent report Morgan Stanley observed: ?The key difference between the 2003-08 period and now is that global growth is no longer supportive. To that extent, it needs an extra policy push to pull India?s growth rate back to trend. ? The brokerage pointed out that corporates are suffering from poor profitability and inflation needs to remain moderate for that to improve.
However, recent data flows have been more than encouraging. The HSBC India Composite Index ?which covers both the manufacturing and service sectors ? rose to a high 59.6 from 54.7 in December. The jump signalled the sharpest increase in nine months. According to HSBC’s India PMI, service sector activity accelerated to 58.0 in January 2012 from 54.2 in December, while manufacturing PMI rose to 57.5 in January from 54.2 in December. Morgan Stanly believes that if India can absorb risks from the euro zone and oil, and these risks do not unfold in, say, six months, the second half of 2012 may prove to be even stronger for equities.
The Dollex-30 index, which calculates the Sensex returns in dollar terms, has gained 20.67% in the last one month, which is nearly double that of Sensex, which gained 10.50%. Similarly, the S&P CNX Defty has gained more than 26% in 2012, compared to a 15% rise in the Nifty.
The rupee started the year at 53.31 against the dollar. Traders, incidentally, expect the rupee to strengthen to 48.60 to the dollar in the near term.
?Foreign investors have gained from the rupee movement and the jump in equity valuations,? says Harendra Kumar, head ? institutional broking & global research? Elara Capital. ? And with expectations that the rupee will strengthen further, FIIs have the advantage of at least one variable moving in their favour, ? he explains.