Rupee trailing EM peers hurts India dollar returns

Benchmark Indian equity indices are at record levels. But, that’s not enough to amuse foreign investors since Indian indices have underperformed the emerging market benchmark in 2017 for the second consecutive year.

The dollar returns of the MSCI Russia, MSCI Brazil and MSCI Chile was 46 per cent, 89 per cent and 37 per cent, respectively, compared with 21 per cent of the MSCI India in the last two years.

The MSCI India index — a key gauge for global fund managers to evaluate their performance in dollar terms — has underperformed the MSCI EM index by 11 per cent and 8 per cent in 2016 and 2017, respectively. The dollar returns are a keenly watched matrix for foreign fund managers investing with a medium-term perspective.



There are several reasons for India’s underperformance. First, better currency performance helped prop up returns of emerging markets other than India. The currency appreciation against the dollar in the resource-rich countries such as Russia, Brazil, South Africa, and Chile was 20-50 per cent in the past two years compared with 14 per cent for the Indian rupee, according to the Bloomberg data.

Second, the absolute and relative valuations of Indian equities are not favourable for a fund manager to increase exposure considering that earnings growth forecast was lowered for the fifth year in a row. The price-earnings spread of the MSCI India was at 50 per cent premium to the MSCI EM index compared with the long-term average of 40 per cent. Indian equities currently trade at 21 times the next year’s earnings, which is 31 per cent higher than the long-term average.

As a result, some of the global fund managers have reduced the overweight of India to just over 150 basis points (bps) from as high as 500 bps two years ago. Overweight reflects the percentage of higher weight in allocation to a country compared with weight specified in the benchmark index, MSCI Emerging Market index in this case.