Dollex & Defty: What Do These Terms Mean in the Stock Market?

If you are not aware of the terms Dollex and Defty, don't worry – we will explain everything in this article. To begin with, I must say that if you know what Sensex and Nifty are in the Indian market, you will easily understand these terms. Perhaps there isn't any investor or participant who isn't familiar with these two major Indian indices, which are widely tracked in India. Without further ado, let's start exploring the concept.

What is Dollex?

The BSE SENSEX, India’s most widely monitored benchmark index, is represented in USD as the S&P BSE Dollex 30. Quoted in US dollars on the BSE, this dollar-denominated version of the Sensex, known as Dollex-30, was introduced on July 25, 2001. Unlike other BSE indices that reflect stock prices in Indian rupees, the Dollex indices adjust for currency fluctuations, providing a view of market growth in dollar terms.

The Dollex index incorporates exchange rate changes to reflect Indian market performance in USD, aligning with rising foreign direct investment (FDI) and the growing integration of India’s equity markets with global markets. By factoring in both stock prices and currency rates, Dollex serves as a key global indicator of the Indian market.

Given its currency adjustment, the S&P BSE Dollex 30 presents dollar-adjusted returns. If the rupee depreciates against the dollar, Dollex 30 returns will be lower than those of the Sensex. Conversely, a stronger rupee will result in higher returns on Dollex 30 than on the Sensex.

For example, imagine the Sensex was at 40,000 in January and increased to 50,000 in December, which reflects a 25 per cent gain. This return would be significant for an Indian investor; however, a foreign investor would also consider currency exchange rates. If the rupee depreciates by 15 per cent from Rs 70/USD to Rs 80.50/USD over the year, the dollar-adjusted Dollex returns would fall to 8.7 per cent, significantly lower than Sensex’s 25 per cent growth. This currency impact, captured by Dollex, is vital for accurately assessing returns from a foreign investor's perspective.

Additionally, the BSE’s major indices have dollar-denominated counterparts, with Dollex-100 and Dollex-200 representing the BSE 100 and BSE 200 indices in USD.

What is Defty?

The NSE Defty plays a similar role to the Dollex but is based on the NSE Nifty rather than the Sensex. It serves as the dollar-denominated version of the Nifty index, accounting for rupee/dollar changes that impact returns for foreign investors. The Defty and Dollex enable international investors to assess dollar-adjusted returns on Indian equities with the same constituent stocks as the Nifty and Sensex, respectively.

Relevance of These Indices

Indices like Dollex and Defty are most relevant to foreign investors—such as FIIs and NRIs—who invest in Indian equities using dollars. Since these indices factor in currency fluctuations, they provide a realistic view of returns for investors measuring gains in USD. Dollex calculates growth by considering both stock prices and foreign exchange variations, providing a true reflection of dollar-based performance for overseas investors who bring in and take out capital in USD.

How these Indices are Different

The S&P BSE SENSEX, also known as BSE 30, is a free-float market-weighted index composed of 30 leading companies listed on the Bombay Stock Exchange. Sensex represents performance in INR, while Dollex is the USD version, designed to assess the same companies’ performance in dollar terms. While the Sensex provides insight into the market’s rupee-based performance, Dollex offers a comprehensive measure of returns for overseas investors by accounting for rupee-dollar fluctuations.

By understanding Dollex and Defty, foreign investors gain valuable insights into the impact of currency movements on their equity returns, making it an essential tool for assessing real returns on Indian equity investments in dollar terms.

Disclaimer: The article is for informational purposes only and not investment advice.