On Tuesday, rupee fell below the 68-mark against the dollar in line with sharp outflow of funds by foreign portfolio investors from the Indian equities and debt markets that has accumulated to over Rs 32,000 crore in the last six weeks. While rupee gained some ground over the last two days and closed at 67.7 on Thursday, rising yields of US Treasury, expected surge in crude oil prices on account of geo-political developments are likely to sustain the fund outflow by FPIs and weakness in rupee in the near term.
On Thursday, FPIs sold equities worth a net of Rs 830 crore and since the beginning of April 2018 the net outflow from the Indian equity and debt markets amounted to Rs 32,668 crore. This has resulted in rupee falling by over 4 per cent since April 1, 2018.
While April saw a net out flow of Rs 15,587 crore – an outflow of Rs 5,552 from the equities and Rs 10,035 crore from the debt market; the pace of FPI outflow only accelerated in May. Till May 17, the net outflow stood at Rs 17,081 crore – outflow of Rs 4,418 crore from the equity markets and Rs 12,663 from the debt market. This has led to a sharp decline in rupee in the month of May when it fell from 66.6 in the beginning of the month to 68.08 on May 15.
By comparison, the first three months of calendar 2018 witnessed a net FPI inflow of Rs 13,239 crore into the Indian markets — Rs 14,013 crore into Indian equities and a net outflow of Rs 774 crore from Indian debt markets.
If the outflow of money is likely to continue, this will also keep a check on the movement in the equity market. On Thursday, the benchmark Sensex at the Bombay Stock Exchange fell 238 points or 0.67 per cent and has lost 386 points or 1.1 per cent this week.
Experts say that the sustained outflows by foreign funds is a major factor resulting in rupee depreciation. “The outflows in FPI are majorly on account of outflows in the debt segment on account of increased expectations of US rate hikes. The economy continued to witness foreign outflows in the month of April 2018 and May 2018, despite RBI enhancing the investment limits and relaxing the rules for foreign investors in terms of revising minimum residual maturity requirement and cap on aggregate FPI investments in central government securities,” said Madan Sabnavis, chief economist at Care Ratings.
However, rupee has not been the only loser this year as other emerging market currencies too have been under pressure on account of strengthening dollar. Between January 1 and May 16, while the rupee has lost 6.3 per cent against the dollar, the Brazilian Real and Russian Ruble have fallen by more than 11 and 8 per cent, respectively.
While the reversal in direction of fund flow began in March, it changed decisively in April in line with reports of better growth prospects in US, rise in treasury yields and concerns over current account deficit in India, following rise in crude oil prices. The fund outflow and a resultant depreciation of rupee against the dollar has caught importers by surprise and is having an impact on their business and earnings. Experts say that the situation is not expected to improve in the near future as the pressures on account of stregthening dollar, ruling high crude oil prices and concerns surrounding the current account deficit are likely to continue.