A recent LinkedIn post by Mayank Agarwal, Co-Founder & Head of Strategy at NeevHQ, has sparked a lively debate about the factors influencing Foreign Institutional Investor (FII) selloffs in the Indian stock market. FIIs have been net sellers of shares worth Rs 1.20 lakh crore in last one year.
Agarewal’s post noted – Mike – a hypothetical investor, optimistic about “India’s booming economy, dives into the market with Rs10,000 (Rs 8 lakh at the time). A year later, he’s celebrating a Rs1.2 lakh profit (before taxes), his portfolio swelling to Rs 9.2 lakh.
But then, the rupee weakens. His ‘grand’ return shrinks to a measly 0.88% after Rupee depreciated from Rs 80/USD to Rs 90/USD, barely beating a risk-free bond. So, Mike, our FII, packs his bags and leaves, claiming that sometimes, the exchange rate giveth, and the exchange rate taketh away.
The post quickly generated hundreds of comments, with many users pointing out the crucial role of hedging in mitigating currency risk. Several commenters argued that sophisticated FIIs typically employ hedging strategies using financial instruments like forward contracts and swaps to protect their investments against currency fluctuations. ‘The author did not know about FX hedging with swap and fwd contracts. He just copy pasted from post,’ a user commented.
Agarwal responded to some comments, acknowledging that FIIs do indeed use hedging strategies. He suggested, ‘but even the best hedge isn’t perfect when the depreciation trend is strong. Seems like Mike just got a taste of the risk before he could put his derivatives to work.’
The discussion also touched upon other factors that could influence FII investment decisions, such as global economic conditions, rising US yields, and concerns about valuations. Some commenters argued that FIIs might be acting prematurely, failing to recognize India’s long-term growth potential. Others suggested that the “India story” may have been oversold as a quick profit opportunity, leading to unrealistic expectations.
