Weak dollar stops FII outflows from India, spurs an inrush of $1 billion

$1 bn returns after foreign investors pulled out $10 bn between November and December

Huge outflows from equity and debt seen during the fag end of 2016 have receded, thanks to the dollar going down and the rupee fuelling up foreign-investor appetite. Between November and December, foreign investors had pulled out $10 billion, on fears of demonetisation and hopes of better prospects in the US under a new dispensation. Although foreign institutional investors (FIIs) still haven't staged a full-blown comeback, markets are relieved the sell-off has ended. 

The Dollar Index, which signals the price of dollar against a basket of currencies, fell three per cent in January and recovered slightly this month. 

Adrian Mowat, chief emerging market and Asian equity strategist at JPMorgan Chase, says weakness in the price of dollar is due to US president Donald Trump calling the dollar price "too strong" and concerns surrounding his economic policies. 

Foreign flows are highly sensitive to currency movements. A rising dollar price sparks capital outflows, while gains in rates of local currencies are positive for inflows.

Stable FII inflows, coupled with strong investments from domestic investors, augur well for the domestic market, say analysts.

The benchmark Nifty has gained 11 per cent, while the BSE 500 index has rallied 13 per cent from their December 2016 lows. The rupee rate, too, has rebounded 2.3 per cent from its November 28 low of 68.77 versus the dollar. Not just domestic markets, but other emerging market (EM) currencies and equities, too, have seen an uptick amid dollar price weakness.

"We attribute current run-up in EMs largely to weakness in dollar price," says Sanjeev Prasad, co-head of institutional equities at Kotak Securities. 

Amid sharp rise in the price of dollar during the end of last year, the equity cash segment saw FII outflows of $4.5 billion. The sell-off was particularly strong in the debt segment, at $6.8 billion. In the last few weeks, FIIs have invested around $600 million in equities and around $400 million in debt. 

Nomura says the improvement in debt flows are seen in regional markets including India, Indonesia, and Thailand.