Rupee plays an important role in deciding what dollar returns that FPI earn. FPIs bring in dollars and invest in rupees after converting them. When they redeem the investments and repatriate the money back it is again converted into dollars. Obviously, if during this period the rupee depreciates then they will take back less in dollar terms. That is why a stable rupee is most preferred. While Indian rupee has shown weakness in bursts like in 2008, 2013, 2016 and again in 2018, the overall secular trend of the rupee over a longer period of time has been flat to strong. Rather, we can see it is calibrated weakening, which again suits the FPIs.

When Dr. Rajan took over at the helm of the RBI in 2013, India had seen outflows to the tune of $12 billion by FPIs from Indian debt. The rupee had sunk from 53/$ to nearly 69/$ in a short span of a few months. This is the kind of situation that most foreign investors hate. Earning 12% returns on equities does not make sense if that gain is going to be entirely wiped out by currency depreciation. That is exactly what happened to US investors who tried to buy European assets at lower prices last year. The return earned in nominal terms was entirely wiped out by the dollar appreciating against the Euro. So what had India done differently? One of the philosophies that Dr. Rajan followed as the RBI governor was to adopt a calibrated depreciation of the INR versus the dollar. This helped foreign investors reasonably estimate their returns net of currency fluctuations. This is in stark contrast to the situation in Brazil, Australia and Russia where the domestic currency plummeted against the US$. Of course the rupee has been one of the worst performing currencies in Asia in 2018 but over longer periods, Indian currency is not so vulnerable. At least, India does not have situations like Russia, Brazil or Turkey where the currencies up to 40% in a single year. That is a big advantage for FPIs looking to invest in India.