A Simple Maths to Show FIIs are Not Returning Soon!

This is a must read for every equity investor

In October 2024, FIIs net sold Rs 114,445.89 crore worth of Indian equity. So far in November 2024, they have net sold Rs 29,533.17 crore. In total, FIIs have sold approximately Rs 1.45 lakh - in less than 2 months. This is huge!

Now, some investors are saying that FIIs will return soon and the market will go up. I don’t think so. And I am going to back my understanding with numbers. Obviously, I am pointing to one case here and FII returning or not will be driven by multiple other factors.

Before I get to the numbers, you need to be aware of one thing - the depreciation of the Indian rupee against the dollar. The rupee has started to depreciate and it is likely to depreciate more. Arup Rakshit of HDFC Bank expects 6-8% rupee depreciation in the next 4 years under Trump 2.0. As per the SBI report, with Trump returning to power, the Indian rupee could reach between Rs 87 and Rs 92.

Now, this will happen over the years. With whatever I have studied about INR-USD relation, and upon checking historical data, the large part of this fall will happen sooner rather than later.

Making this assumption, it does not make sense for FII to enter the Indian market unless the rupee falls and stabilizes before declining further. Now, let me explain this with numbers.

Scenario Setup

1. Current Exchange Rate: 1 USD = 84 INR

2. Future Exchange Rate: 1 USD = 90 INR

3. Investment Return: I assume the Indian stock market offers a hypothetical 10% return in INR over a year (the same calculation be used for 2-3-4 years)

Now, let's analyze the impact on FIIs with the following calculations:

Step 1: Calculate FII's Potential Return with Current Exchange Rate

Suppose an FII invests $1 million in the Indian equity market.

• At an exchange rate of 84 INR/USD, this is equivalent to:

  $1,000,000 × 84 = Rs 84,000,000 

• With a 10% return in the Indian market, the investment grows to:

  84,000,000 × 1.1 = Rs 92,400,000 

Step 2: Calculate USD Return if the Exchange Rate Remains the Same

If the rupee remains stable at 84 INR/USD:

• The final investment value of Rs 92,400,000 converted back to USD would be:

  92,400,000 / 84 = $1,100,000 

• This would yield a 10% return in USD as well, aligning with the 10% INR return.

Step 3: Calculate USD Return if the Rupee Depreciates to 90 INR/USD

If the rupee depreciates to 90 INR/USD, let’s convert the final INR amount back to USD:

• The Rs 92,400,000 investment value at the new exchange rate would be:

  92,400,000 / 90 = 1,026,667 USD

• This means the FII would have a return of:

  (1,026,667 − 1,000,000) / 1,000,000 × 100 = 2.67% in USD

• Despite the 10% gain in INR terms, the FII’s actual return in USD terms would only be 2.67% due to currency depreciation.

Getting these newsletters every week to you takes time and effort, so as a token of appreciation, please subscribe to the newsletter.

Step 4: Assess the Impact of Exchange Rate on FII Decisions

If FIIs expect a depreciation of the rupee from 84 to 90, the effective return in USD terms would drop significantly (from 10% to just 2.67%). Given that FIIs aim to maximize their returns in their home currency (USD in this case), such a low return might not be attractive, especially when there are other markets with stable currencies and similar or better returns.

Please note, the numbers here are for educational purposes. The rupee could fall to 86-87 or more - difficult to predict but the fall can be bet upon with higher probability.

So, if you were an FII investor, would you invest in the Indian market after knowing this data?

If you are one of those investors who think the market will recover because FII will return soon (the definition of soon can vary), please reevaluate.

If you have liked to content, please share it with your family and friends.

---

About me - In the last few years, I have noticed that many investors struggle with basic investment concepts. To address this, I have started a personalized newsletter offering easy-to-understand, actionable insights to help investors make better decisions. I have written over 5000+ financial blogs and want to share my knowledge and investing journey with you so you can become a confident investor. Join my journey. SUBSCRIBE NOW.