Are FIIs done with the India story?

by Vyas Mohan/ DNA Money

While they bought shares worth Rs 479.50 cr net in June, they have already sold Rs 237 cr

During the last 15 trading sessions this month, foreign institutional investors (FIIs) have been ambivalent to Indian equity markets. At one point, they had even sold more shares than what they bought in the whole of June. Fed chairman Ben Bernanke’s comments on core inflation toning down in the US on Thursday saw FIIs coming back, but only to stay for a day.

While the FIIs bought shares worth Rs 479.50 crore net in June, they have already sold Rs 237 crore this month as on Friday. So, have the FIIs stopped buying the India story? Market experts say that the FIIs are turning away from equity in general, and not India specifically. “Hardening of interest rates and higher crude prices have made investors risk-averse. Hence, funds are flowing from equity to debt instruments, which have turned more attractive due to interest rate hikes. The outlook for equity as an asset class, thus remains hazy, but things will be clearer in about three months from now,” says Manish Sonthalia, vice-president, equity strategy, Motilal Oswal Securities.

The FIIs invested a record Rs 47,181 crore in 2005, averaging net inflows of Rs 3,931.75 crore a month. However, in 2006, net FII investments have averaged only Rs 1,660.92 crore till date. Thus, this year will see much lower FII investments compared with 2005, unless there is a miraculous rebound in interest. To match last year’s investments, the FIIs will need to invest an additional Rs 36,285 crore between now and December-end, or an average

Rs 6,615.45 crore a month. If inflows touch that level, the Sensex will be up there in the clouds.

Nobody thinks that is likely, but then nobody wants to say it’s all over, too. “The next two months are crucial,” says Kumar Nair, managing director of Transwarranty Finance, a Mumbai-based investment bank. Investors are on the back foot and they are closely watching the index of industrial production, which saw 9.8% growth in April-May this year compared with 9.5% last year.

The RBI’s credit policy review meeting on July 25, which is widely expected to raise interest rates by a quarter percentage point, is also being closely watched for signals.

While rising interest rates are bearish for stocks in general, any major drop in market valuations could attract foreign funds, says Nair. On the valuations front, the price-to-earnings ratio of the Sensex has fallen from 22.95 on May 10, 2006, to 17.94 as on July 21, 2006. Since India Inc is projected to report an average profit growth of 15-20%, this ratio could drop further in the months ahead.

But valuation-driven buying can come only later, once there is clarity on the direction of oil prices, inflation and interest rates, says Sonthalia of Motilal Oswal.

In 2006, FIIs were net buyers of equity worth Rs 3,678 crore in January. They pressed the pedal in February as well, mopping up shares worth a net Rs 7,588 crore. However by April, they started showing signs of fatigue, and turned net sellers for the first time in May. They have only invested Rs 10,796.70 crore in 2006 till date.

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