In sharp contrast to savvy foreign institutional investors, mutual fund (MF) investors are yet to recover from the correction in the markets last February.
Net inflows into equity funds (excluding tax-saving schemes) in the past two months stood at a negative Rs145 crore. Monthly investments had averaged Rs2,320 crore in the previous two fiscal years, as investors lapped up equity schemes to ride the bull market.
New equity scheme launches collected funds worth Rs2,782 crore, excluding which redemptions would have been more than Rs2,900 crore. Going by data collated by the Association of Mutual Funds in India (Amfi), net inflows into equity schemes of MFs is entirely on account of new fund launches.
Between 1999-2000 and 2006-07, Indian MF companies got net inflows worth Rs74,107 crore. During this period, collections from new scheme launches stood at Rs76,078 crore. The dependence on new schemes is easy to understand. Gullible Indian investors are easier to target with units priced at Rs10. Besides, new launches provide more leeway for marketing expenses, compared to existing schemes where total expenses are capped at 2.5% of assets.
Markets regulator Sebi’s attempts to clamp down on this haven’t been too successful. Companies first shifted to launches of closed-ended schemes to escape the new rules. But in the past few months, even open-ended schemes have made a comeback. Collections from new schemes fell about 40% year-on-year to Rs22,327 crore in 2006-07 (the first year in which Sebi’s new rules were applicable), but much of that had to do with the markets’ crash in May 2006. Growth through new scheme launches is still the order of the day for MF companies.
RBI and the rupee
The story behind the rupee appreciation has been that the Reserve Bank of India (RBI) stopped buying dollars in March and April as a result of which the rupee suddenly moved up. Some said this was a deliberate move, aimed at fighting inflation through the exchange rate rather than through higher interest rates.
Data recently released by the central bank, however, may cast some doubt on that account.
It turns out that RBI bought a net $2 billion in April, after a net $2.3 billion in March. True, that’s well below the $11.8 billion it bought in February. But then, the February number was an aberration—RBI bought a total of $14.9 billion during the other 11 months of FY07. Between June and September 2006, it stayed away from the market altogether. So, it seems that it is not so much RBI that has changed its policy, but other circumstances that led to the rupee appreciation.
Not surprisingly, the sudden appreciation occurred at a time when the dollar started losing strength against the major currencies also. For instance, the dollar lost 4.8% against the Euro between 7 February and 7 May, while the rupee lost 7.2%.
The rupee appreciation was sharper than most other currencies. What could be the reason? Forex consultants Mecklai Financial points out in its report, Taking stock of the Rupee’s rise, that the correlation between the US Federal Reserve’s dollar index and the rupee used to be very strong, but since 2002, when the dollar index started falling, the correlation started to weaken, as RBI intervened to prevent the rupee appreciation. In other words, the rupee appreciation now is simply a process of catching up, perhaps till the correlation is restored.
Or could it merely be that the spate of capital inflows is too overwhelming? As RBI deputy governor Rakesh Mohan pointed out in a speech recently, “The issue remains how long and to what extent such an exchange rate management strategy would work given the fact that we are faced with large and continuing capital flows apart from strengthening current receipts on account of remittances and software exports.”
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