Weaker rupee raises spectre of waning FII inflows

The risk of foreign institutional investor (FII) flows into Indian stocks drying up has heightened in the wake of the steep decline in the rupee. As the currency inches closer to its record low, FII inflows are showing signs of waning, with these investors selling in two of the last five trading sessions till Thursday. These investors were net sellers today too, to the tune of Rs 270 crore, according to provisional data.

So far in June, FIIs have net bought shares to the tune of roughly Rs 118 crore after, pouring in a little over Rs 83,300 crore.

“As long as the direction (of rupee movement) is down, it (fall in FII flows) will continue for a while because only when the rupee stabilises will they take a fresh view,” said Ambareesh Baliga, managing partner, Edelweiss Global Wealth.

Concern over the US Federal Reserve adopting a tighter monetary policy has resulted in the dollar strengthening against most currencies, including the rupee in the last few weeks. The rupee, which has fallen six per cent from early May, closed at 57.07 against the dollar today. It is 25 paise away from the record low of 57.32 hit in June 2012.

“Generally, in this sort of situation if they have bought funds at Rs 52-53 levels and sold them at Rs 56-57 levels, then it is sort of a double whammy, if the markets are coming down,” said Baliga. “As of now, the general view in the market is that the rupee could fall to Rs 59-60 against the dollar, although that is not our house-view,” he added.

A weakening rupee against the dollar erodes the Indian share portfolio of FIIs and deters these investors from bringing in fresh money. Investors are also worried that the decline in rupee caps the government’s ability to contain the current account deficit and fight inflation, even as it limits the Reserve Bank of India’s ability to ease monetary policy more aggressively.

But, a declining rupee could benefit a few sectors, where the focus in on exports. About 52-54 per cent of Sensex earnings come from companies which have exposure to international markets, either by way of exports or through international operations. The six per cent decline in the rupee against the dollar since May could, theoretically have a 3.2 per cent positive impact on Sensex earnings. “Key beneficiary of this slide in rupee is going to be pharma and IT companies,” said Sonam Udasi, head of research, IDBI Capital.

However, a part of this positive impact will be negated because these companies also depend on imports. Companies which have borrowed in foreign exchange would also be affected.

“Broadly speaking, the biggest impact will be for companies, which have recently raised foreign funds because the depreciation in the rupee could see their debt liability going up and payments going up,” said Saurabh Mukherjea, head of equities, Ambit Capital. “Further slide in rupee will make it difficult for these companies to manage their finances.”

Companies in the IT space like Infosys, TCS and Wipro, which generates almost 90 per cent of their revenue from the international markets, have already seen some upgrades due to rupee depreciation. Kotak Institutional Equities have raised its earnings estimates for top IT companies in the range of three to five per cent for the financial year 2014-15. Analysts also believe some auto majors like Bajaj Auto, Tata Motors and M&M could see positive impact, given their exposure to international markets. Similarly, companies like Hindalco and Tata Steel in the metals space, have large earnings exposure to international markets and will tend to gain. Companies in the textiles and tyres segment and those which depend on petrochemical-based products could see their earnings getting impacted negatively because of their large dependence on imported raw materials.