Giving trouble currency

Even if, for the sake of argument, FIIs wanted to invest more in the country despite the falling growth and plunging corporate profitability, the falling rupee poses an additional problem of exchange rate risk—for the year, though, FIIs haven’t pulled out much, though in 2010 their inflows were about $30bn. An FII investing $1 at R50 to the dollar and earning a nominal return of 10% ends up with a minus 5% return if the rupee falls to 58. The falling rupee is also the reason why exporters are holding back repatriation of their proceeds that much longer. In other words, the rupee seems to have got into a self-perpetuating spiral, which means it is now vital RBI starts taking some action.

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