Expect near-term pullback by foreign investors

By the historic trend, Indian markets could see another round of sell-off by foreign institutional investors or foreign portfolio investors (FIIs/FPIs).

Data from 2010 indicate when the broader indices have taken a cut of two per cent or more on a single day, it has had cascading effect on FII flows. FIIs have typically sold Indian equities during such periods. For instance, last year, when devaluation of the Chinese currency took the S&P BSE Sensex all the way from over 27,000 to retest 25,000 between August and September. FIIs sold Rs 21,000 crore of shares in the Indian markets during this period, including Rs 5,000 crore in a single session (August 24).

Prior to 2015, hell had broken on Indian stocks in 2011. This was also a year when FII were net sellers (the third occasion since 1993 for which data is available) of Indian equities, thanks to the heavy market pullback that began in late September. Heavy selling that lasted for seven trading sessions wiped off all the gains in Indian equities that year.

It was no better at the start of 2016. Foreign investors remained sellers of Indian equities and their selling activity heightened in February, when they pulled out nearly Rs 6,500 crore.

With the benchmark Sensex plunging 1,000 points intra-day on Friday’s session, provisional data indicate foreign investors have again started exiting (they sold Rs 629 crore of shares on Friday). “There could be some repositioning of weights among emerging markets (EMs) and investors might redeem their funds. So, we could expect FPI sell-off to continue”, says U R Bhat, managing director, Dalton Capital Advisors.  

Dhananjay Sinha, head of institutional research at Emkay Global Financial Services, adds that until the impact of global events settles, foreign investors will not be in a rush to return here. “Compared to the foreign currency or bond market, equities reacted more sharply to Brexit, as the event was not priced into equities,” he points out.

Experts are divided on the intensity of sell-off by foreign investors. A section feels that as gold and US equities are regaining their position of safe-haven investments, inflows to EMs might recede. Others like Dipen Shah, senior vice-president at Kotak Securities, while acknowledging the possibility of lower allocation to EMs, feel India will continue to remain among the preferred destinations for FIIs. “India will be less impacted even if FIIs pullback from EMs,” he says.

Ajay Bodke, chief executive officer (CEO) at brokerage Prabhudas Lilladher, agrees and says the intact macro economic fundamentals of the Indian economy might ensure an FII sell-off is temporary.

Apart from equities, other segments could see a rub-off. Saurabh Mukherjea, CEO, institutional equities, Ambit Capital, cautions on higher FII sell-off in the bond market as compared to equities. “To me, the pain awaiting in the forex and bond markets is more severe,” he adds.

And, he says, if more countries opt out of the European Union, that could put pressure on the already enfeebled European banking system and have a cascading impact on foreign flows into Indian equities.

On the whole, as the possibility of further devaluation of the Chinese yuan persists, experts believe foreign investors might adopt a wait-and-watch mode before taking fresh exposure to Indian equities.

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