FPI boost: Rupee remains stable in 2019, down just 1.7%

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Published: October 28, 2019 12:45:35 AM

According to latest data available on the department for promotion of industry and internal trade (DPPIB) website, total FDI flows into India stood at over $39 billion between January and June 2019.

In contrast, the picture was completely different in 2018 when the rupee depreciated by over 13% between January and October, with foreign investors dumping both equities and bonds. In contrast, the picture was completely different in 2018 when the rupee depreciated by over 13% between January and October, with foreign investors dumping both equities and bonds.

The year 2019 has been a stable year for the rupee that depreciated by just about 1.7% this year as strong foreign portfolio investor (FPI) inflows, coupled with significant foreign direct investments (FDI) into the country, supported the currency.

FPIs have pumped a total of $13 billion into Indian bonds and equities this year. The currency also witnessed support from significant FDI inflows. According to latest data available on the department for promotion of industry and internal trade (DPPIB) website, total FDI flows into India stood at over $39 billion between January and June 2019.

In contrast, the picture was completely different in 2018 when the rupee depreciated by over 13% between January and October, with foreign investors dumping both equities and bonds. Bloomberg data shows that FPIs were net sellers of bonds and equities, having cumulatively sold about $13 billion on a net basis till October 2018.

Moreover, the dollar index, which tracks the strength of the US dollar against a basket of US trade partners’ currencies, had moved up by about 4% to 95.96 by October 2018 — indicating that a strengthening dollar had also had its impact on the rupee. This movement was limited this year at about 1.55%.

In 2019, some of the major negative triggers for the currency this year came during the second half that include a sell-off in the equity markets post the announcement of the Budget, sudden spike in oil prices due to the drone attack on the Saudi Aramco facility, as well as yuan depreciation led by uncertainties related to the trade wars between the US and the China.

As MS Gopikrishnan, independent market expert, pointed out, FPI outflows from equities post the Budget were compensated by jump in FDI flows. “Rupee tends to depreciate by an average of 3-3.5% per year over longer periods. I expect the currency to close between 72-72.50 level by December-end,” he said.

Oil prices were also a major cause of concern last year with Brent crude prices rising $20 per barrel through the year to over $86/bbl by October 2018. In 2019, brent crude prices did not go above the $76/bbl level.

Going further, experts believe that there could be some depreciation in the currency in the coming months.

Manish Wadhawan, independent fixed income and forex expert expects some slowdown of FPI flows over the next two months. “One can expect some normalisation on interest rates in the developed world in the coming months in the wake of the debate on the efficacy of the negative rates and the impact they can have on growth.

If that happens, we can expect some amount of emerging market currencies to weaken eventually, leading to some sort of pressure on the rupee. We can expect the currency to depreciate by about 1% by the end of the year,” he said.

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