FII inflows: Long term story still intact!

Rohit Joshi, Siddharth Tak, Ajay Vaishnav/ZRG

After a buying spree of Rs 81,870 crore in the first five months of this calendar, foreign institutional investors (FIIs) have sold Indian shares worth nearly Rs 6300 crore so far in the June. While acknowledging short term pain for the emerging markets, experts are optimistic that FII flows will stabilize in medium to long term into Indian equity markets.

Interestingly, it is not for the first time FIIs have turned net sellers of Indian shares in the month of June. According to the Securities and Exchange Board of India (SEBI) data, since 1997 FIIs have turned net sellers on five occasions. In June 2012 and June 2008, FIIs sold shares worth Rs 501.3 crore and Rs 10,095.8 crore respectively. Similarly in June 2002 and June 2000, FIIs sold shares worth Rs 381.1 crore and Rs 959.3 crore respectively. Moreover, in June 1998 FIIs sold shares worth Rs 804.9 crore.

Explaining the rationale behind the recent pull back activity of FIIs, Jyotinder Kaur, economist at HDFC Bank says, “Global uncertainty and the knee jerk reaction to a clearer path of tapering of the quantitative easing (QE) program by the US Federal Reserve (Fed) are the major reasons behind the selling activity of FIIs.”

Kaur’s thought that the sell-off was triggered by the US Federal Reserve got endorsed from Sunil Sinha, head of economic research and chief economist at rating agency Crisil who avers, “The entire episode of sell-off was mainly triggered a month back when Ben Bernanke, the chairman of US Federal Reserve commented about the possibility that quantitative easing program may come to a halt.”

FIIs flow is hurting Indian currency movement as well, says Avinash Gorakshakar, research head, “Rupee movement is critical to FII flows. They won’t bring fresh dollars until the time rupee gets stabilized. Recently, Ben Bernanke clearly said that by December they will start reducing the liquidity by cutting QE. Most of the FIIs were already aware of the situation and hence they have turned net sellers of Indian equity,” he stresses.

While FIIs have paused in pouring money in Indian equity markets, SEBI data indicates that no new FII has registered with the market regulator in almost six months of the current calendar year. SEBI data reveals that the number of registered FIIs is 1759, the same as on December 31, 2012.

With regards to no new entry in FII register this calendar and its impact on FIIs flow, Sinha at Crisil explains, “FIIs flow is not linked with the registration of new FIIs with SEBI. However, it is to do more with what existing FIIs are doing and the situation prevailing in the global markets.”

FIIs inactivity is a cause for concern.

“It is not a good sign that numbers of FIIs are not increasing but only top 25 FIIs are majorly active in the markets. Hence, new FIIs number is not so important,” Gorakshakar at adds.

Referring to the outlook on FIIs flow, Sinha at Crisil asserts, “Recently Ben Bernanke categorically stated that there is no possibility of Fed stopping the 85 billion dollar purchases of bonds per month. My own sense is that the earlier trigger is no longer valid which prompted FIIs to withdraw money and hopefully things will somewhat stabilize.”

Short term pain is there for the emerging markets. However, in the long term money will come into India. Gorakshakar at says, “Options and Futures data suggests that FIIs have gone short on the markets and more sell off may happen. In June, July hedge funds may take out money but by August FII flows may start coming into India.”