The Sensex is much cheaper for a dollar investor today despite closing above 20,000. Today, a dollar investor can buy a lot of Sensex futures for $5,555. The value of a lot of Sensex is calculated by multiplying the index value by 15. Thus, a lot of Sensex at the end of Friday’s trade would cost a little over Rs 3 lakh (20,039 *15).
At the exchange rate of Rs 54 a dollar, a foreign investor would have to pay $5,555 to take a position on the Sensex. The same position would have cost him over $7,500 in December 2007, when the index first closed above the magic number. The exchange rate was below 40 then. Thus, for a dollar investor, the Sensex is available at a 26 per cent discount, or at 14,800.
The difference was not this steep when the index crossed 20,000 briefly in late 2010-early 2011. Then, the rupee was at 44-45 levels. Between January 2008 and March 2009, the rupee weakened from 40 levels to 51 levels, driven by a flight of foreign investors, while the Sensex slumped to below 9,000. But over the next 18 months, as foreign institutional investors (FIIs) brought dollars back, the rupee strengthened to 44 levels when the Sensex touched 20,000.
However, subsequent events in Europe and the flight for safety had fuelled a dollar rally, that is independent flows into and out of India. So, despite huge inflows over the last few months, the dollar is still quoting at 54 levels against the Indian currency. This recent phenomenon, where the dollar has remained strong despite foreign inflows into the stock market, has widened the discount, said currency experts.
Foreign institutional investors (FIIs) are not a homogeneous group. Therefore, this widening discount works differently for different investors. For those who entered Indian stocks five years ago, this has blocked the exit route as their investments will still be deep in the red. But it offers a cheaper point for newer investors.
Deepak Jasani, head-retail research, HDFC Securities, said: “There are different types of foreign institutional investors who may have different entry points, different time horizons and different mandates. They follow different strategies and stock preferences. In that sense, one cannot generalise and say that as the Sensex has underperformed over three to four years in dollar terms, most FIIs would have lost money.”
Jasani said he expects the flows to continue into the Indian markets, though the pace may vary every quarter. “However, on a net basis, I expect the flows to continue. FIIs, as a category of investors, will not give up on the India story.”
In a recent report, Credit Suisse analysts said: “We find it hard to be structurally optimistic about the currency. Our foreign exchange strategists are looking for the rupee to be 53.5 against the dollar in March, before dropping back to 56.5 by the end of 2013.”
