Indian Investment-A double whammy for FII’s

On one hand Europe’s debt crisis coupled with slowing US economy, FII’s are forced to sell equities in India. Due to the continuous selling by FII’s which is not being absorbed by commensurate domestic buying, Indian shares are plunging. Despite this FII’s are forced to sell equities for their domestic reasons.

This problem has aggravated by the depreciating Indian rupee.

Let us understand how depreciating rupee aggravates the situation-

If ‘ABC corp.’ invests 100 $ in India at the time when rupee-dollar exchange rate is 40, i.e. a dollar fetches you 40 rupees. So ABC corp. invests 4000 rupee in any stock or debt instrument.

 If rupee-dollar exchange rate becomes 50 (i.e. a dollar fetches you 50 rupees), the corpus of 4000 rupees becomes 80 dollars- a clear loss of 20 per cent.

Since August 26, rupee has almost depreciated by 13% against dollar.

Depreciating Indian Rupee

This is why; money flows out from a country with depreciating local currency.

FII’s are worst hit with falling stocks along with depreciating rupee.