Imagine that you bought some Gold with Dollars (could be any currency you have) and suppose after some time Gold loses 5% of its value and you decide to sell the Gold because of depreciation you will get a little lower amount of Dollars than what you purchased for.
In other words, You are exchanging Gold for Dollars. Since the Gold you own is worth-less now you can’t buy the equivalent number of Dollars.
Similarly, an FII who has Investments in India wants to get the money back to the US.
First, it has to exchange the Investments for Rupees and then exchange the Rupees for Dollars since the Rupee is down it can’t buy the equivalent number of Dollars.
On the other hand, If someone is buying Rupees he/she can get a little more.
In some cases, the Investments could be Up as well minimizing or nullifying the loss.
But why does the market go down even in that scenario?
Let’s think about things from a FIIs perspective it has Billions of Dollars invested in India. The reason Rupee is going down could also make the markets go down as well. So now the FII has three options :
Keep the money invested and risk it losing more value in the future.
Take some out to minimize the Risk.
Take all of it out at a low loss.
Option one will happen if the events are bad for a very short term. This totally depends on the probability of loss and the much money is involved.
Option two will happen most of the time if not every time. FII could just buy again another day if it thinks the market is stable now or sometime later. Also, it could invest that money in a more safe place (bonds, etc). Since the money is involved in such large Quantities it results in Markets Going down a little.
This also creates an opportunity because many times the markets go up the next day giving a chance to buy stocks at a Discount.
Option three will happen 1 in a Billion times. If the US declares war and somehow the FII gets the news before the declaration and gets all the money out before that even with that it will have to face a lot of losses due to the sheer amount of money. And the FII could be sued as well for insider trading.
Thanks for reading this is my first article if you have any suggestions please comment them I will be thankful