Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

Yen – Rupee Currency Mismatch and Selling in Indian Market

3 min read

Nifty CMP : 4517

If you noticed the entired month of June you find that FII's remain the net sellers
for the entire month of June upto date.
 
Why FII's are selling? Did they feel that our market is vulnurable to invest?
The Questions are simple to ask but the explainations are difficult? Which i tried
to put it in front of you and tried to equate the YEN,USD,RUPEE mismatch to the FII selling
 
FII Net Investments from June,2008 Onwards
 
Reporting Date Debt/Equity Gross Purchases(Rs Crores) Gross Sales(Rs Crores) Net Investment (Rs Crores) Net Investment US($) million at month exchange rate
02-JUN-2008 Equity 4215.20 3960.60 254.60 63.10
Debt 0.00 0.00 0.00 0.00
03-JUN-2008 Equity 2483.20 2832.50 (349.30) (86.60)
Debt 0.00 0.00 0.00 0.00
04-JUN-2008 Equity 2966.80 3919.20 (952.30) (236.10)
Debt 0.00 25.00 (25.00) (6.20)
05-JUN-2008 Equity 3245.70 4070.90 (825.20) (204.60)
Debt 0.00 15.00 (15.00) (3.70)
06-JUN-2008 Equity 3739.60 5158.50 (1419.00) (351.80)
Debt 0.00 30.00 (30.00) (7.40)
09-JUN-2008 Equity 2887.30 2580.30 307.00 76.10
Debt 0.00 15.00 (15.00) (3.70)
10-JUN-2008 Equity 2556.60 3898.40 (1341.80) (332.60)
Debt 0.00 0.00 0.00 0.00
11-JUN-2008 Equity 3311.50 4155.50 (844.00) (209.20)
Debt 0.00 0.00 0.00 0.00
12-JUN-2008 Equity 3768.40 3919.90 (151.50) (37.60)
Debt 0.00 0.00 0.00 0.00
13-JUN-2008 Equity 3169.50 4311.20 (1141.70) (283.00)
Debt 0.00 0.00 0.00 0.00
The investments corresponding to reporting date 26-Feb-2007 include prior period adjustments.
 
Where the FII's and Hedge funds are getting their money?
 
Bank or Japan(BOJ) is lending money to FII's and Hedge funds with interest rate as low
as 0.5%.( Can you able to imagine such a damm less interest rate i.e 5 rupees interest
for every 1000 rupees borrowed from BOJ )
 
Here is a simple example to showcase how Yen Carry Trade Structure Works Out
 
1) Assume that Yen is Currently Trading at 100/Dollar(See March USD-JPY Chart) and a hedge fund borrows 
100 Billion Yen from BOJ and its translates to 1Billion US Dollars
 


 

USD – YEN 3 Months Charts Click the Charts to get Enlarged

USD – INR 3 month Charts Click the Charts to get Enlarged

2)If these 1 Billlion Dollars are Invested in Bank of America at 3.25% interest rate then the margin is your profit
i.e ( 3.25-0.5 = 2.75%) approximalely the profit is 27.5 million US dollars without doing nothing. Here the condition is assumed that yen remains stable. Assume the profits if these money is invested in Emerging markets like India where interest rates are high. Here is a Simple Video explaination for Yen Carry Trade which is easy to understand http://www.youtube.com/watch?v=o9YNGGKbhH4
 

Nifty 3 months Charts Click the Charts to get Enlarged

3)Yen carry trade, in simple words, means borrowing funds in yen at a very low or negligible interest rate and using this loan to buy higher yielding assets in other markets. But Practically Yen is a highly volatile currency. If the Yen Appreicates Say,96/Dollar then the Hedge fund has to pay more interest rate which could affect his returns and the investor is forced to sell his assests bought in emerging markets where the key interest rate is very high. And If the Yen depriciate then the investor have to pay less interest rate. So he will stay with the markets remain invested.
 
4)Currenlty Yen Depriciates from 104/Dollar to 108/Dollar in this month alone which is clearly witness from the USD-YEN 3month chart. So the FII Investors
Should remain invested in our market. But the recent figures shows that FII's are the net sellers almost the till to date of June.
 
5)The Reason is For the Past two Months(April and May) Rupee Appriciated from Rs39 to Rs 43/Dollar. It means Nearly 10% Currency Depriciation(may be  Due to inflationary pressures)  in terms of Dollar. It means the interest rate India is  getting decreased and so the decreased asset prices in terms of Dollar.  And also at the same time Yen Depriciate not even 2%(Yen moved from 102 to 104/Dollar) in terms of Dollar . There is a mismatch of nearly 8%(10%-2%).So In General the investor have to pay a Net Interest Rate of (8%+0.5%= 8.5%) even though Yen depriciated 2%.
8.5% interest rate means almost their profit has gone what they earned hard in our markets. So a heavy sell off starts here and the FII money are getting removed from our markets and the Indian Investors like us are in panic mood to Sell our Shares.
 
6)So Whenever the Yen Starts Depriciated above 105/Dollar selling comes to the market(Now Yen trading at 108/Dollar ) . Hedge funds Net Interest rate get moderated.But eventhough Hedge Funds have to pay high interest rate than before because of high rupee depriciation which is negative for our market sentiment.
So there is a clear mismatch in the interest rate in Yen,USD and Rupee
 
7)As per current situation Yen depriciated to 8% in terms of dollar in last three months i.e yen moved from 100 to 108/Dollar But Rupee depriciates to 10% in terms if dollar from Rs39 to Rs 43/Dollar in last three months.
Still a slight mismatch prevailing in these currencies.
 
8)If our Inflationary pressures are gonna  deppriciate our rupee further then our market is going to face serious
selling pressures further. Even a 2-3% depriciatation in rupee against dollar say Rs44/Dollar going to affect our
market much.
 
Now, Everything in hands of RBI. And Do Remember – Still our Inflation if getting increased and experts are commenting that 10% of Inflation figures is possible by next week due to rise in our domestic petrol and diesel prices
 
 

If you strongly disobey this information
do kindly share it with me here.

Regards,
Rajandran R
Author – MarketCalls

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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