The Stock Market has tumbled over the past couple of weeks and one group of people claim that the fall in the value of the rupee is one of the key culprits. Then we have another group that claims that the fall in the stock market is partially the reason for the depreciating rupee. What do you think is correct?
For a change, let me start off this article with the answer - Both group of people are right in their claims. The purpose of this article is to understand why both groups are correct!!!
FIIs & Their Role in the Indian Stock Market
FII's are an integral part of any stock market especially the ones like India which are considered extremely attractive.
Definition of an FII: Source Investopedia
An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds.
Though the actual % of FII Investments in the stock market will keep varying on a daily basis, they account for a pretty big chunk of money that is invested in our markets. The chunk is big enough that when FIIs start selling our markets tank and tank big time. The recent stock market fall is a classic example. FII's have turned sellers and are liquidating their positions therefore the stock market is falling freely.
So, What Triggered this Panic Selling?
Let me give you a real life scenario. Let us take myself as an Example. Let us say I have bought 1000 shares of Infosys on 1st April 2013 at Rs. 2943/- per share. On that day 1 SGD was worth 43.73 Rupees.
Amount Invested in Indian Rupees: 29,43,000
Amount Invested in Singapore Dollars: 67,299
As of Today, the price of 1 share of Infosys is selling at 3108 (At the time of writing this article) which is a gain of 5.6% in 5 months which is cool. But, 1 SGD = 53 Rupees today.
Current value of Investment in Indian Rupees: 31,08,000
Current value if Investment in Singapore Dollars: 58641.5
So, technically my stock has gone up by 5.6% in Rupee terms but since the Rupee is so devalued when compared to the time I invested, I am currently sitting at a loss of over 12%
Given the current economic outlook and the fact that the rupee may fall further, do you think I would want to continue to stay Invested?
This is exactly the reason why all FII's are pulling out their investment because, they want to salvage whatever they can of their investment before it erodes further in value. This mass selling is resulting in the stock market going further and further south.
So, we have proved one groups theory - The Falling Rupee is the reason for the Stock Market Crash.
Does this Market Crash have an impact on the Rupee?
Definitely Yes. All these foreign investors who are selling their shares in the Indian market are effectively pulling out foreign currency from our Market. Overseas investors have pulled out nearly Rs 18,500 crore from the Indian capital markets in July. In their highest monthly outflow, overseas investors pulled out a record Rs 44,162 crore in the month of June. Outflows of this magnitude has put a continuous pressure on rupee not allowing it to come out of the slump. With FII's selling more and more on a daily basis to salvage their investments, the rupee is continuing to get beaten down further.
so, we have proved the other groups theory too - The Falling Market is also a reason for the Falling Rupee
What to Expect in the Near Term?
The Rupee has actually stabilized today and so has the stock market. In fact it has posted handsome gains as of this writing. However, I highly doubt if this will last in the long run. Though as an Indian I really want the Indian currency to recover and our markets to get back on the bull, the policymakers are the ones who can really have an impact. The new governor of RBI is taking charge in a few days and given his impressive resume market analysts and industry experts are expecting him to turnaround the fortunes of the Rupee and save the economy.
But, in the short-term (around 3-6 months) don’t expect the market to go up by much. It will remain volatile as it is now and will be going up and down until there is clear-cut picture of what to expect from the new RBI Governor, the elections in 2014 and the overall Indian Economic scenario.
Stay Cautious and Happy Investing!!!