Foreign funds exit as flaring crude turns up heat on rupee

Overseas investors in India’s bonds and equities appear to be exiting local assets due to the recent increase in global oil prices, reflecting the pressure on the rupee and debt yields just days before the first round of voting.

Foreign funds have net sold about $862 million in capital assets (bonds plus equities) so far this month, data from Bloomberg showed, explaining the recent declines in local asset prices and underscoring the importance of post-election stability in determining future fund flows. Lower oil prices are also crucial for New Delhi to hold down its import bills and draw overseas investors.

“All three markets, including equities … are only corroborating overseas money outflows,” said Ashutosh Khajuria, ED, Federal Bank. “As long as crude prices are rising, foreign portfolio investors are unlikely to come back.”


Global crude oil prices have surged about 7 per cent in the past one month, with Brent crude touching $70 to a barrel. This climb has inflated India’s import bills.

India meets more than threefourths of its energy needs through imports.

Electors would begin voting to choose lawmakers to the lower house of Parliament from April 11 in the first of seven rounds of polling that concludes mid-May. Votes are scheduled to be counted on May 23.

Meanwhile, bonds appear to have lost more than stocks did. Overseas investors net sold $780 million of bonds until April 4, data available with Bloomberg showed.

“It is a double whammy for investors in the currency and money markets,” said Anindya Banerjee, analyst at Kotak Securities. “Overseas investors find this the right time to exit investments as election uncertainties remain and rising crude oil prices stoke fiscal concerns.”

The rupee might lose against the dollar and yields might remain elevated, Banerjee said.

On Monday, the rupee lost 0.65 per cent, or 45 paise, to close at 69.67, the weakest level since March 12. Between April 2 and April 8, the unit has lost 1.34 per cent against the dollar and dealers expect the rupee could fall to as low as 70.50 to the dollar.

The direct correlation between portfolio investments and the exchange rate was evident in March, when about $5 billion was invested in debt and equity assets amid the rupee’s general ascent.

“Also, uncertainties over the political mandate in the forthcoming elections and fiscally profligate populist manifestos make the near-term outlook on both currency and bond markets rather volatile,” said Manoj Rane, MD at Sionic Advisors India, a global financial services company serving institutional clients.