FIIs who were the primary movers of the Indian stock markets during the last few years are not likely to come back in the near future, Kunj Bansal of Kotak Securities had said in an interview to CNBC TV18 last week. And today, results from an India Infoline survey of global fund managers seem to support that view.
According to the survey, there is excessive pessimism on India. Less than 5 per cent of funds are overweight on India. Most long -term holding funds are underweight and most hedge funds are running short positions.
FII behaviour
Since January 2008, FIIs have net sold Rs 58466 crore in the equity market. During the same time, the markets fell from 20000 levels to 8800 levels. Compare this with total flows in 2007, the FIIs were net buyers to the tune of Rs 70940 crore between January 2007 and December 2007; the Sensex during this time went from 14000 to 20000 levels.
Players in the market believe that the markets can find a new level only when liquidity flow in terms of money availability from foreigners improves. In the near future however, FIIs who had been putting up their money earlier will not be come in as first movers.
The reasons are not surprising. Nirmal Jain, CMD of India Infoline explains, "The biggest worry that foreign investors have is that of fiscal deficit, which, if we include state deficit and balance sheet deficit, is already above 13 per cent. And the fiscal concession will make it rise by 0.50 per cent or so, that is very high."
Uncertainty on the outcome of the general elections is also acting as a negative factor for India, the survey reveals. As Jain explains, "One key problem that India has is politics and
the way policies are implemented. Even if we look at the fiscal and tax concessions that have come; logically this should have come at the time of the budget which was a week ago.
Nothing has happened in the last one week for the government to come back with these kinds of things separately. Similarly the interest rate cut is now widely expected. Everybody knows that sooner or later RBI has to do it. Inflation is heading to a very low number and within a month it may be around 2 per cent. But the delay in procrastination which the policy makers do are the things which affect the sentiment about India."
Add to this the outlook downgrade on India by S&P from stable to negative. While the rating itself has not gone down and is still investment grade, it is a shorter step to be downgraded.
This will again impact inflows as funds that can invest only in investment grade instruments or countries might stay away.
Domestic power
Kunj Bansal however feels that international institutions are likely to stay away because they are stuck in problems of their own and in fact their problems are worse than ours. Globally and domestically, people are running for safety. That explains the phenomenal rise in the price of gold in the recent rally as also the rush to park money in debt funds.
And that if any money has to come in Indian market it will be first from the domestic institutions
But domestic institutions tell a different story. They have either been selling or buying only in small numbers as compared with FIIs. Mutual funds were net buyers to the tune of Rs 10863 crore from January 2008 till January 2009. In calendar 2007, they net purchased Rs 6159 crore.
In the month of February 2009, they have net sold Rs 1750 so far.
Outlook for FII inflows
As of now the sentiment for FIIs is weak. However, Jain says that if the political situation improves in the next 2-3 months then probably we can see fund flows improve for India.
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