What moves Indian Rupee? —Effect of FDI, FII in deciding Indian Rupee exchange rate.

In case of India, it may seem that FIIs and FDIs, which makes a lot of headlines, have a great role in moving Indian Rupee exchange rates. But it is quite far from reality. In last 5 years India has received very high inflows both in FPI and FDI while INR has moved structurally downtrend during the period. It is an important factor but not very dominating in long term movement of INR. 
There has been a fundamental change taken place in recent decades in respect of the importance of exchange rate movements due to capital flows as against trade deficit and economic growth rate. The latter do matter but the former is primary determinant of day-to-day exchange rate movements.

Yearly FPI (FDI) and NRI flows in India: FDI, FII flows failed to lift Indian Rupee; Capital flows

It is very clear from the table that even high FDI and FPI inflows couldn't save INR from depreciating in long term.

So what is actually moving Indian Rupee?

It is the trade balance, notably the movement in crude oil and gold prices and export growth, that wields a greater influence on the Indian currency. 
For instance, in 2014, the country received the highest ever FPI and FDI inflows at $42 billion and $34 billion respectively. NRIs fused another $11 billion into bank deposits. But the INR lost 2.7 per cent against the USD. In 2009, when $18 billion of FPI flows lifted Indian equity prices from bear-market lows, INR gained around 4%. It implies that there are other more dominating factors taming Indian Rupee.
In 2012, a sharp increase in gold imports to $56 billion was one of the reasons why the INR reeled down. Moreover the crude oil, having greater share in imports, has more impact on INR movement than that of gold.

Interest rate hike by US Fed plus falling brent crude oil prices did support INR which was over however compensated by the low exports due to weak global demand especially in Europe (interestingly China doesn't have high impact on India as we have only around 3.8% exports to China) and exiting FPIs.

What is Indian rupee dominated "Masala bond"? -Advantages to Corporates, Investors and the Country.

Author- Shubham Saxena

You might have heard of Samurai bond of Japan, Dim Sum bond of China now we have spicy Indian Masala bond. Rupee dominated offshore bonds, popularly called Masala bonds are becoming more appetizing for both issuers and investors, and India also stands at an advantageous position with masala bond.

What is a masala bond?

Masala bonds are issued by Indian corporates in offshore markets such as LSE, NYSE via IFC (International Financial Corp.), the funding arm of World Bank and are invested by the foreign investors. These are issued and payable in INR but redemption and repayment will be linked to INR vs USD or other foreign currency exchange rate. That means they are subjected to currency exchange rate risks. 

But in INR dominated masala bonds contrary to USD dominated bonds (ECB), FX risk is beared by the creditor i.e. the foreign investor. That means the Indian local issuer does not have to worry about the currency movements. RBI allows eligible Indian institution to raise a maximum of $750 million per year through masala bond with a minimum maturity period of five years.

Indian rupee dominated Masala bonds issued by the International
Finance Corporation (IFC), an arm  of the World Bank for offshore
funds raising by Indian corporates.2013

The first masala bonds were issued by the International Finance Corporation (IFC), an arm  of the World Bank, in October 2013.  In 2014, overseas investors bought $26.5 billion of Indian government and corporate bonds onshore. In coming years this figure will reach  new highs with the success of masala bonds. Many more Indian companies are lining up to raise funds from masala bond.

Advantages of Masala bond

Benefit to Corporates

1. They can borrow at low interest rates from offshore markets. Interests rates in developed countries are much lower than prevalent in India. 

2. Being issuer they are not subjected to FX risks. It will be fully borne by the investors. Indian corporates have suffered considerable losses earlier on ECB which are usually USD dominated due to continuous structural downtrend of INR against USD since last 2-3 decades.

3. They can access wide investor base.

4. It will also help in diversification of portfolio.

Benefit to Investors

1. Masala bond, carrying relatively much higher interest rate, is a great investment option for offshore investors.

2. They can bet on INR exchange rates. They can benefit when rupee appreciates against the bond's redeemable/repayable currency.

3. Investors who are reluctant to venture into unknown markets can easily show interest in masala bonds owing to the credibility of IFC.

Benefit to India

1. This will help in building up foreign investors confidence and knowledge about about Indian economy. 

2. This will contribute to capital account, thus balancing Balance of Payment.

3. Masala bond is a good way to tap foreign capital. India has envisioned few many ambitious goals like Makes in India, developing smart cities, digital India, boosting infrastructure, climate INDC etc. For this India will require around $400 billion (INR26 lakh crores) in next five years. A big chunk of it will have to be financed by foreign capital. India has to look for ways to tap foreign sovereign wealth and attract foreign capital.

4. INR has been falling in a structural downtrend since last few decades against major hard currencies. Given that FX risk is borne by the creditor, during repayment of bond coupon and maturity amount, if rupee depreciates, RBI will realize marginal saving during repayment.