Significance of Currency in Stock Market:
If there is FIIs investment in any stock market, you can't understand the game of stock market without understanding the game of currency. Dalal Street and Mint Street are complimentary to each other. Activity in one market affects the other market.
The FIIs in Indian Stock Market:
The Foreign Institutional Investors were allowed to invest in Indian securities markets from the year 1992-93. In the year 2000 they were able to influence our share bazaar. The Bull Market of 2003 to 2008 in Indian stock market, which took SENSEX from the level of 3000 to 21000, had major influence of FIIs investments. The fall of 2008, in which SENSEX crashed from 21000 to 8000, was also controlled by FIIs. Here you can find a report which tells impact of FIIs on Indian Stock Market.
Relation of Currency and Share Bazaar:
To understand the relation of currency with stock market we should take a simple example. Suppose a FII sold Nifty at 6300 in January 2008 and the USDINR was at 40. So that FII took home $ 157.50 (6300/40). In October 2008 when Nifty was at 2300 and USDINR was at 49, if that FII bought back Nifty he had to pay $ 47 (2300/49).
Let us take another example. In May 2013 Nifty was at 6200 and USDINR was at 54. In August 2013 Nifty came down to 5200 and USDINR touched a low of 69. So in USD terms Nifty come down from $ 115 to $ 75. If an Indian investor had sold Nifty at 6200 and bought it back at 5200, he got a return of 16 percent. But if a FII had sold it he got the return of 35 percent.
Nifty was at 6200 in 2008 and Nifty is at 6200 in 2013. But USDINR was at 40 in 2008 and 62 in 2013. For FIIs Nifty is 36 percent cheaper than that it was in 2008.
Dollex and Defty:
BSE has a dollar linked version of SENSEX called Dollex-30 and NSE has CNX Defty which gives the true picture of Nifty in terms of USDINR. In January 2008 Nifty was at 6300 and Defty was at 5500. In November 2013 Nifty was at 6300 and Defty was at 3380. You can see that for FIIs our market is much cheaper in 2013 than it was in 2008.
Brief history of INR:
In 1948 after the independence, the value of INR (Indian National Rupee) was equal to USD (United States Dollar) and GBP (Great Britain Pound). After independence, India had selected a fixed rate currency system. Till 1965, the value of INR was 4.79 against USD. Three repeated wars, first with China in 1962, second with Pakistan in 1965, and third again with Pakistan in 1971 decreased the value of INR to 8.39 against USD.
In the year 1985 the value of INR fell to 12. In 1991, India faced balance of payment crisis and Government of India was forced to devaluate INR to 17.90. The value of the Indian currency was decreased to 31.37 in year 1993 and Indian currency was partially freed to trade. Till 2002 the INR was reduced to 49. The value of INR was improved to 39.50 by December 2007. After that INR touched the historic low of 69.22 in August 2013. Here you can find detailed history of rupee.
In August 2008, currency derivatives were commenced in India. Four pairs are allowed to trade. These are USDINR, GBPINR, JPYINR, and EURINR. The currency derivative is traded on NSE and MCX-SX exchanges. On November 28, 2013 BSE also started trading in currency derivatives. Trading timing in currency derivatives is 9 a.m. to 5 p.m.