FII pull outs sway rupee with dollar

Significant investors in government bonds FIIs have been net sellers since May 22.

Indian rupee's slide against the greenback was partially fuelled by extensive sale of debt paper by foreign Institutional Investors (FIIs), for over two weeks.

FIIs are significant investors in government bonds, and they have been net sellers since May 22. The cumulative sells (net) by FIIs during this period amounted to $2.1 billion, according to Securities and Exchange Board of India (Sebi) data.

The rupee today hit a record low of 58.14 against the dollar. It has lost almost three% since beginning of the month.Treasury executives with banks say that the fall in rupee value reflects importers' demand indicating pressure. Further, view on  fragile macroeconomic situation of the country, along with sales by FII's, adds to the forex volatility.

On the dollar side of the story, the market sentiment in the United States is showing signs of improvement,

giving rise to prospects of an early reversal of Quantitative easing. Quantitative easing involves Central Banks gradually scaling down their steps to pump in liquidity into the market, indicating confidence in economic recovery.

Such indications also prompted some overseas investors in Indian debt market, to take out money back to developed markets. This led to demand for dollars from their custodian banks in domestic currency market. The domestic currency market is shallow and any spurt in demand for hard currency weighs on exchange rates, bankers said.

A treasury head with Indian arm of a European Bank said, “The fall in rupee has been too quick. It seems overdrive. These debt market players (FIIs) would have already hedged their foreign exchange exposures." Yet, when they place orders, their banks purchase them on the spot.

"There is apprehension that dollar-rupee volatility is eroding the gains for FIIs who have invested significantly in government bonds. So they are partly pulling out, before their gains evaporate," said the head of treasury of a large public sector bank.