Mumbai: Foreign institutional investors (FIIs), one of the largest categories of investors in the local equity markets, have bought Indian stocks worth $6.64 billion (Rs29,481 crore) in the year-to-date, the highest in the first four months of a year since they were allowed entry into the country in 1992.
Fund managers are divided over prospects for foreign fund inflows to India and other emerging markets in the rest of the year as the Greek debt crisis shakes investor confidence amid concerns that contagion could spread to other economies.
The money that FIIs have pumped in beats the previous record of $4.21 billion that came in during January-April in 2004, when the markets were in the middle of a bull rally, according to data released by the markets regulator, the Securities and Exchange Board of India (Sebi). This doesn’t include the numbers for 30 April, which will come out on Monday.
“Risk appetite, right or wrong, has made the assumption that emerging markets are safe,”said V. Anantha Nageswaran, chief investment officer of wealth management firm Julius Baer Group in Singapore. He said flows to India were unlikely to be affected as “long as we are not seen losing control of our (growth) story”.
India’s industrial production grew at 15.1% in February over a year ago, and is seen at around the same level in March. With company earnings growing at double-digit pace, the economy is forecast to grow at 8.8% in 2010, according to the International Monetary Fund.
“Within Asia, the recent positive price-trend correlation in stocks and bonds, along with currencies, suggests strong underlying structural demand for Asian assets,” wrote Henry Hon, Michael Kurtz and Daniel McCormack of Australia’s Macquarie Bank in a 29 April research note.
Graphic: Ahmed Raza Khan/Mint
However, others are not so optimistic and said that risk appetite might wane because of the problems surrounding Greece and some other European economies such as Spain and Portugal.
Late Sunday, European ministers meet in Brussels to endorse a bailout package for the debt-laden Greek economy, not only to save it from defaulting, but also to prevent a contagion spreading to other economies, in return for tough austerity measures including salary and pension cuts and raising taxes.
Greece is burdened with debt to the tune of 115% of its gross domestic product (GDP), and running a deficit of close to 13% of GDP.
“The confidence (among investors) has been shaken. We have to watch this space (Eurozone) closely,” said Ullal Ravindra Bhat, managing director, Dalton Strategic Partnership Llp, a foreign institutional investor registered in India. “One can’t assume that risk appetite will go up because of the bailout package.”
To be sure, a slowing of foreign inflows may help alleviate the concerns of policymakers worried about inflation that’s close to double-digit levels, and the rupee’s appreciation, which makes Indian exports less competitive. The rupee has gained around 5% against the dollar since the start of the year.
Equity markets around the world took a tumble last week, after credit rating agency Standard and Poor’s cut the debt rating of Greece to junk status on Tuesday and downgraded Spain and Portugal. While the US’ Dow Jones Industrial Average fell 1.75% in the week till 30 April, the UK’s FTSE index shed 3.49%. Emerging markets were hit too, with the local benchmark, the Sensex, losing 1% over the week.
The increase in FII inflows, however, hasn’t boosted the local markets much. The Sensex has gained only 0.54% this year and the broader BSE 500 index 2.93%. Part of this is explained by the fact that local mutual funds have sold shares worth Rs7,529 crore in the same period. The Sebi data also includes fund flows to the primary market. So far, this year, 28 firms have raised money worth Rs10,000 crore from new share sales.
The European downgrades have increased risk aversion among investors, wrote Clive McDonnell and Ryan Tsai of BNP Paribas SA in a 30 April report, according to Bloomberg.
They have recommended that investors should also sell shares in India among emerging markets because historically it has been among the most vulnerable to short-term foreign fund flows. Indeed, at least one-third of foreign flows to India are from so-called ETFs, or exchange traded funds, essentially short-term funds which easily change direction, say brokers and analysts.
Dalton’s Bhat refers to this as “footloose money”.
BNP has forecast that around $6 billion may be withdrawn from funds investing in Asian shares next month, Bloomberg reported. According to global fund tracker EPFR, emerging market equity funds have attracted around $15 billion net inflows, year to date.
AFP and Bloomberg contributed to this story.