If you observe casually, you will find that whenever the FIIs pump money into India the rupee strengthens and whenever the FIIs withdraw money en masse, there is a weakening of the Indian currency. One can argue that India depends less on FII flows and more on domestic flows, but that is not the point. The domestic flows only impact the market but the FII flows also entail dollar conversion so that impact the market valuations and the currency. That is the dual impact that makes the FII flows important.

Over the last few years, this has emerged as a key determinant of the value of the rupee. Normally, healthy FII flows into India results in strengthening of the INR versus the dollar while heavy bouts of selling by FIIs results in weakening of the INR. The INR is a function of FII flows into equity and debt as both entail foreign exchange inflows into India. FIIs already own more than 20% of Indian equities and have emerged as the most significant player in the Indian equity markets.