Rupee fall spells big troubles for FIIs

A sharp fall in rupee value, which is already rubbing salt on the foreign investors' injury in the Indian stock market, may create further troubles for their entry into the newer segments such as currency trading.

The market has fallen by over 25% since the start of 2011, but the losses for overseas investors has been much higher at more than 36% due to the rupee depreciation.

The rupee value has depreciated by more than 20% so far in 2011 and hit a record low of below Rs 54-level last Thursday against the US dollar.

On Thursday last week, the Reserve Bank swung into action to check slide in rupee value and speculations by imposing restrictions with immediate effect on forward trading in the local currency by FIIs and traders, and also capped the banks' exposure to the forex market.

Sources said that the rupee volatility and the RBI's action in this regard does not augur well for the stock market entities that were awaiting the entry of FIIs (foreign institutional investors) in trades on currency exchanges.

A leading bourse has been advocating for the FII entry in currency derivative (CD) trading, but some others have opposed the idea on the ground that such a move would bring in convertibility through back door and add to the volatility.

Sources said that the presence of FIIs in CD trading on exchanges, in current scenario, would have added to the rupee volatility and could have led to a even sharper fall, given the market-moving capabilities of the foreign investors.

Besides, the prevailing rupee market trends could also go against the proponents of zero-transaction charges in the securities market, as a highly volatile rupee could have led to very strong selling volumes on the bourses, they said.

FIIs are very active traders in the Indian market and their actions hold key to the broader market movements.

But, they have suffered huge losses this year due to the double-whammy of falling rupee and plunging stock prices.

A fall in rupee value, from the time an overseas entity makes the investment, leads to further depreciation in the value of the gains realised in terms of the US dollar.

For example, a $100 investment would have been worth about Rs 4,400 at the start of 2011, but its value would be about $80 after conversion into the US dollar at current rates, if the stock price is taken as unchanged.

A fall in the stock prices has further eroded the value of the investments made by foreign players.

The average loss for foreign investors so far in 2011 is about 36%, as per the movement in the BSE Dollex index -- the US currency equivalent of the Sensex.

Turning heavily bearish on Indian stocks, FIIs have been net sellers to the tune of Rs 2,000 crore so far in 2011 -- as against a net purchase of over Rs 1.3 lakh crore in 2010.