CNX Defty – Falling rupee and impact on FII returns

Today, I have a chart for you that describes the impact of a weakening Indian rupee on foreign institutional investors (FIIs).

How does the falling rupee hurt FIIs?

Suppose you are an FII. You have raised money in US Dollars. Suppose you brought USD 10 into India for investing it in the stock market at a time when the exchange rate was INR 50 : 1 USD. Assuming no transaction cost while converting, you would have INR 500 to invest in the Indian stock market.

Today the exchange rate is roughly INR 57 : 1 USD. Suppose that between the time you bought stocks to today, your stock portfolio has not moved. No profit, no loss.

If you exchange INR 500 for USD, you will get USD 8.77.

That’s a loss of around 12% purely due to exchange rate.


CNX Defty vs. CNX Nifty chart

The CNX Defty index is a means of tracking the combined effect of moves in the CNX Nifty and the INR-USD exchange rate.

The following chart captures the divergence of the CNX Nifty and CNX Defty. The only variable between them is the exchange rate.

Both indices have been converted with the assumption that they start off at 100 at the start of January 2005. This enables us to compare them easily.

CNX Defty vs. CNX Nifty performance chart


It is clear that the falling rupee is hurting FII portfolios.

If I take the period from the start of January 2011 to June 2013, the CNX Nifty is down by 4% while the CNX Defty is down by 24%.

That’s a whopping 20% under-performance because of the falling rupee.

Many believe that fund flows at the margin affect our markets and that these are typically FII fund flows.

If it is true, then this does not bode well for our stock market. The government is not doing a good job at all. We have a bad combination of high inflation which is sticky, low growth and high deficits. That the rupee is depreciating is no surprise.

If FII flows at the margin shrink, it affects the current account deficit adding fuel to the fire.

I don’t know where the rupee is headed. It’s a fool’s game to predict it.

But this is not good for our markets.

Again, I can’t get tired of saying this.

Stick to good companies with decent financial performance. Buy in at safe prices. Sleep peacefully.


I thought of writing this article after speaking with my friend Jason.

He shares his perspectives on the markets through the lens of technical analysis at Through Jason’s blind eyes.

He told me that he looks at technical analysis charts from a Defty perspective. His logic is that FII flows at the margin affect our markets. Hence he looks at the charts from the perspective of an FII looking at Indian markets in terms of dollar returns.

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