IMPACT OF FIIs ON AN ECONOMY

-IN THE INDIAN SCENARIO

AND SOME OTHER

Presented by
Gaurav Kedia (09012)
gauravkdia@gmail.com
Calcutta Business School
December 2008, Kolkata, India
Investor Survey: FIIs on the driver seat

On a macro level, what will significantly impact the Indian stock markets in the near future? In
this article we give an insight on some of the most voted factors.

Buying/ Selling by FIIs: Clutching the highest number of votes (45.3%), FII activity was seen
as the key driver that could impact the Indian markets over the longer term. As seen from the
following graph, higher FII inflows have been an important parameter determining the
movement of the stock markets. In 2007, when FII invested US$ 17.2 bn, stock markets
notched 46% gains. The Indian economy grew over 8% for the third consecutive year and the
prospects looked good for 2008. However in the following year, global financial crisis clouted
the world markets, with India being no exception. This led to the FIIs turn into net sellers. The
total FII disinvestment in 2008 was to the tune of US$ 13 bn. In the same period, the benchmark
BSE Sensex lost 52% of its market capitalisation. This clearly indicates that the FIIs play a
critical role. Having said that, it would interest investors to know that while the FIIs have shied
away, investments through the FDI (foreign direct investment) route have stupendously shot up
in the past few months, given the attractive valuations. This is expected to hold good for India’s
long term growth story.
India is better positioned than its developing and developed peers in terms of long term
fundamentals. It does not have a credit or a real estate bubble. It also has a large domestic
consumption market, unlike China which depends on exports. Indians have a savings rate as
high as the Chinese. These factors are expected to lure the FIIs once again to the Indian shores.
Infact, in December 2008, they were net buyers of Rs 14 bn worth of stocks (after having sold
stocks worth Rs 279 bn between August to November 2008). The FIIs are currently holding
Indian stocks worth US$ 53 bn.

Policy/Regulatory initiatives in India: Following the FII factor, policy and regulatory
initiatives got 37.8% votes. While the government is pursuing economic reforms, the pace of
implementation leaves a lot to be desired. In order to improve the economic growth, need is for
structural and economic policies on a faster scale. Policies are vital for faster infrastructure
development, employment growth and strong GDP growth. Further, policies regarding
improving public finances, fiscal policy, FDI limits, and privatization are also a requisite.

Elections in India: 15% of the respondents have voted the elections in the country to
significantly impact the Indian stock markets in the near future. With the world’s largest
democracy expected to go to the polls in April-May of this year, elections would definitely play
an important role in determining the investor sentiments. The saga of India growth story and
feel good factor has declined in the last one year. The elections would be very important as they
will be held in an environment of global credit crisis, lower domestic growth, higher fiscal
deficit, rising terrorism and religious conflicts. In order to continue with our growth story, a
stable development oriented government is need of the day.

Terrorism in India: 1.6% of the respondents have voted for this factor to influence the stock
markets. The recent terrorist attacks in India were an added blow to an economy already
suffering from internal problems. A Harvard University study (Terrorism and the World
Economy, October 2005) states that higher levels of terrorism risk are associated with lower
levels of net FDI. The loss of foreign investor confidence following acts of terrorism would
prompt large outflows of capital. If the terror attacks and domestic violence continues in India,
the impact on stock markets would be greater.
ABSTRACT
This paper examines the impact of foreign institutional investors' (FIIs) investment
policy and FII portfolio flows to the Indian markets, an aspect, to determine in what ways
do they affect an economy. FIIs have been allowed to invest in the domestic financial
market since 1992; the decision to open up the Indian financial market to FII portfolio flows
was influenced by several factors such as the disarray in India's external finances in 1991
and a disorder in the country's capital market. Aimed primarily at ensuring non-debt
creating capital inflows at a time of an extreme balance of payment crisis and at developing
and disciplining the nascent capital market, foreign investment funds were welcomed to the
country. FII inflow to India grew manifold from US $0.18 million (net, monthly) in January
1993 to about US $400 million within a year's time. Given the volatile nature of capital
flows to emerging markets seen in the early 1990s and the nature and growth of such flows
to India, FII investment in India, obviously called for special regulatory attention.
Investment by FIIs in India is jointly regulated by Securities and Exchange Board of India
(SEBI) through the SEBI (Foreign Institutional Investors) Regulations, 1995 and by the
Reserve Bank of India through Regulation 5(2) of the Foreign Exchange Management Act
(FEMA), 1999.
INTRODUCTION
FIIs - Foreign institutional investors as the name suggests, are companies registered outside
the own country. Its category of investment instrument is more easily traded, are less
permanent and do not represent a controlling stake in an enterprise. These include
investment via equity instrument (stocks) or debt (bonds) of a foreign enterprise which does
not necessarily represents a long term interest.

Their main intention is to make capital gain.

For e.g. FII buy GDR (global depository receipt) or any instrument of India of reliance
company at 90 US dollar which rises to 150 US dollar (say after 2 days) than he will
immediately sell them to make capital gain.

Source:
FII come as investors, from mutual fund companies, portfolio management and corporate
with pure motive of investment gains.

Form:
FII inflows come through stock markets.

Regulator body:
FIIs are regulated by SEBI (Securities Exchange Board of India)
Various policy changes:
With coming into force of the Foreign Exchange Management Act, (FEMA), 1999 in 2000,
the Foreign Exchange Management (Transfer or issue of Security by a Person Residing
outside India) Regulations, 2000 were issued to provide the foreign exchange control
context where foreign exchange related transactions of FIIs were permitted by RBI. A
philosophy of preference for institutional funds, and prohibition on portfolio investments by
foreign natural persons has been followed, except in the case of Non-resident Indians,
where direct participation by individuals takes place. Right from 1992, FIIs have been
allowed to invest in all securities traded on the primary and secondary markets, including
shares, debentures and warrants issued by companies which were listed or were to be listed
on the Stock Exchanges in India and in schemes floated by domestic mutual funds.

Historical evolution of FII Policy is summarized below:

September 1992: FIIs were allowed to invest in all securities in both primary and
secondary markets and schemes floated by mutual funds. Single FIIs to invest 5 per cent
and all FIIs were allowed to invest 24 per cent of a company’s issued capital. Broad based
funds to have 50 investors with no one holding more than 5 per cent.
The objective was to have reputed foreign investors, such as, pension funds, mutual fund or
investment trusts and other broad based institutional investors in the capital market.

November 1996: ‘100 per cent debt FIIs’ were permitted to give operational flexibility to
FIIs.

April 1997: Aggregated limit for all FIIs increased to 30 per cent subject to special
procedure and resolution.
The objective was to increase the participation by FIIs.

April 1998: FIIs were permitted to invest in dated Government securities subject to a
ceiling. Consistent with the Government policy to limit the short-term debt, a ceiling of
USD 1 billion was assigned which was increased to USD 1.75 billion in 2004.

June 1998: Aggregate portfolio investment limit of FIIs and NRIs/PIOs/OCBs enhanced
from 5 per cent to 10 per cent and the ceilings made mutually exclusive.
Common ceilings would have negated the permission to FIIs. Therefore, separate ceilings
were prescribed.

June 1998: Forward cover allowed in equity. FIIs were permitted to invest in equity
derivatives. The objective was to make hedging instruments available.
February 2000: Foreign firms and high net-worth individuals permitted to invest as sub-
accounts of FIIs. Domestic portfolio manager allowed to be registered as FIIs to manage the
funds of sub-accounts.
The objective was to allow operational flexibility and also give access to domestic asset
management capability.

March 2001: FII ceiling under special procedure enhanced to 49 per cent. The objective
was to increase FII participation.

September 2001: FII ceiling under special procedure rose to sectoral cap.

December 2003: FII dual approval process of SEBI and RBI changed to single approval
process of SEBI. The objective was to streamline the registration process and reduce the
time taken for registration.

November 2004: Outstanding corporate debt limit of USD 0.5 billion prescribed. The
objective was to limit short term debt flows.

April 2006: Outstanding corporate debt limit increased to USD 1.5 billion prescribed.
The limit on investment in Government securities was enhanced to USD 2 bn.
This was an announcement in the Budget of 2006-07

November 2006: FII investment up to 23% was permitted in infrastructure companies in

the securities markets, viz. stock exchanges, depositories and clearing corporations.
This is a decision taken by Government following the mandating of demutualization and
corporatization of stock exchanges.

January and October 2007: FIIs were allowed to invest USD 3.2 billion in Government
Securities (limits were raised from USD 2 billion in two phases of USD 0.6 billion each in
January and October)

June 2008: While reviewing the External Commercial Borrowing policy, the Government
increased the cumulative debt investment limits from US $3.2 billion to US $5 billion and
US $1.5 billion to US $3 billion for FII investments in Government Securities and
Corporate Debt, respectively.
FII: How do they impact Indian Economy?
1. FII leads to appreciation of the currency:
FII need to maintain an account with RBI for all transactions. To understand the implication
of FII on the exchange rate we have to understand how the value of one currency appreciate
or depreciate against the other currency.

What is currency appreciation: for example if the current foreign exchange rate is 1 USD
(US Dollar) = 50 INR (Indian rupees) but which after some time fluctuates and becomes 1
USD = 40 INR, this would means that the Indian rupee has appreciated over the US dollar.
The logic is very simple.
For e.g. if an Indian customer wants to buy one quantity of ice cream from USA market
(suppose price of 1 ice cream being 1 USD), he will have to pay 50 INR which is equal to 1
USD. But when exchange rate changes he will have to pay 40 INR instead of 50 INR which
is equal to 1 USD.
In short purchasing power of Indian customer will rise and they will have to pay lesser
amount to buy the same quantity of same ice cream or they can buy more quantity of ice
cream at price they paid earlier.
Similarly, when forex rate is 1 USD = 40 INR, but which after some time becomes 1 USD =
50 INR that means INR has depreciated over the USD.
Reason being the same.
We take one example.
Suppose India imports ice cream from USA. First quote is 1 USD = 40 INR and price of
one quantity of ice cream is 1 USD.
This means Indian customer will have to pay a amount equivalent to 1 USD that is 40 INR,
but if forex rate is 1 USD = 50 INR, they will have to pay more.

Now I come to the point how domestic current appreciates or depreciate as and when
FII inflows or FII outflows.
When FII come to India they create rupee demand and by demand and supply rule
the price of INR appreciates.
Similarly when they withdraw their capital from the domestic market or when they
sell their shares in the stock market, it creates a demand for US dollar, as a result of
which INR depreciates.

I would like to take one more example. In 2008 our forex rate over the US dollar was
USD = 39 INR. This was because FII were net buyers (FII inflow was more in Indian
market) but which today is 1 USD = 48 INR (approximately). This is because of FII
outflow from Indian market is more than what was formerly.
This FII inflow makes the currency of the country invested to appreciate (e.g. FII
investing in India may lead to rupees appreciating over other currencies) and their
selling and disinvestment may lead to depreciation.

2. FII and exports:

From the other side of the story, if Indian currency appreciates just because of FII (net
inflow in India) there is an adverse effect on our exports. Our export industry will become
uncompetitive due to appreciation of rupees.

E.g. if 1 USD = INR 40 and a soap costs 1 USD. Now when rupee appreciates to 1 USD =
20 INR, I will have to sell the same soap to US for 2 USD in order to sustain the same
income that I have been making i.e. 40 INR.

The logic is very simple. First I sold my soap at INR which was equal to one USD. But
after appreciation I would like to sell it at 2 USD to get my same income which means that I
will have to charge more from customers in USA. But in return customers for my soap will
become less.

Therefore excess FII fund inflow in the country can also make a negative impact on
the economy of the country.
In such a situation industries like IT, jewelry and textiles are badly affected. However
we have seen that during such periods of appreciation, government issues some
packages especially to these industries.

3. FII and stock market:

By now we know that FIIs are always welcomed but in a way which does not disturbs the
control in the economy. But when the market cap or the market ceiling on FII is increased,
they can bring in lot of funds in the country’s stock market and thus can make a greater
influence in the way the stock market behaves, going up or down. The FII buying pushes
the stock up and their selling pushes the stock market down.

4. FII and inflation:

Huge amount of FII fund inflow creates a huge demand for Indian rupees. In a situation like
this, RBI has to print more money to be issued in the market. But on the contrary, this
could lead to excess liquidity thereby leading to inflation , where too much money
chase for few goods and service (perfect example of demand pull inflation)
Thus there should be a limit to the FII inflow in the country.
5. FII and local companies:
When huge FIIs comes to a country, availability of fund for local companies increases.
During such periods, the local companies can expand their coverage and operations.

6. Capital formation in domestic market:

Huge FII inflows also effect the capital formation in a country. Take a case where a
country’s savings rate is not sufficient to meet its investment programmed, but if in such a
situation, there is sufficient FII inflows, then there will be no problem. The country will not
have to borrow from other countries or from the International Bank. India is a developing
country and its domestic saving is low compared to developed countries. So we need proper
FII inflows.
FIIs are very dangerous in case of HOT MONEY
concept:

Let’s take an example. If RBI allows an interest rate of say 9% on foreign investor’s
deposits, which is comparatively higher amongst the top ten Asian countries, foreign
investors will be attracted towards Indian markets to make capital gain. But if in this case,
Bank of china also raises their interest rate say up to 10 % which will be higher than India
also, all FIIs will be shift from Indian markets to the Chinese markets and this will again
happen if any other nation again increases its interest rate. Thus these FII inflows are very
volatile. It disturbs the economy at the time of coming and going. And hence this concept is
called the hot money concept.
Factors affecting the FII:
1. Interest rate of a country:
If the interest rate of a country is high, all FIIs will want to invest in that country to make
good capital gain.

2. Money supply and inflation rate:

If money supply is adequate and inflation rate is stable FIIs will invest in that country.

3. Exchange rate of the country:

If the exchange rate of country is highly volatile or fluctuates significantly, FIIs will be
discouraged to invest in that country. So exchange rate should be stable.

4. Balance of payment:
Deficit in balance of payment is the indicator. So FII will avoid investing in that country.

5. Economic growth:
FIIs would always want to invest in those countries, which are growing at a faster rate like
India, china and Korea.
FIIs on Indian economy:
Market Outcome:
Foreign Portfolio investments in India come in the form of investments in American
Depository Receipts (ADRs)/Global Depository Receipts (GDRs), Foreign Institutional
Investments and investments in offshore funds. However, FIIs constitute a major proportion
of such portfolio flows (see table). The share of FIIs in total portfolio flows was as high as
95.97% in 2003-04 and 93.25% in 2004-05. It declined to 46% in 2006-07. This decline in
FII investment in 2006-07 can be attributed to global developments like meltdown in global
commodities markets and equity market during the three month period between May 2006
to July 2006, fall in Asian Equity markets, tightening of capital controls in Thailand and its
spill over effects.

Composition of Foreign Portfolio Investment in India

(US $ mn)
Off-shore % contribution of
Year GDR/ADRs FIIs funds Total Foreign FIIs to Total
Portfolio Foreign Portfolio
and others Investments Flows
2001-02 477 1505 39 2021 74.47
2002-03 600 377 2 979 38.51
2003-04 459 10918 - 11377 95.97
2004-05 613 8686 16 9315 93.25
2005-06 2552 9926 14 12492 79.46
2006-07 3776 3225 2 7003 46.05
2007-08 8769 20328 298 29395 69.15

Source: RBI
 % contribution of FIIs to Total Foreign Portfolio Flows
120
100
80
60 % contribution of FIIs to Total
40 Foreign Portfolio Flows

20
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

The share of FII investment in total portfolio investment for 2007-08 is provisionally
estimated to be 69.15%. The large FII inflows (net) in 2007-08 at USD 16 billion as against
USD 6.7 billion in 2006-07 reflects increased participation of FIIs in the primary market as
corporates raised large resources through 85 initial public offerings (IPOs) and 7 follow-on
public offers (FPOs) aggregating to Rs 545,110 million. (US $ 13,638 million).

Looking at monthly trend in FII investments during 2007-08 (see table), it can be seen that
net FII investment has been positive during most of the months. The months of August
2007, November 2007, January, 2008 and March, 2008 saw net outflows of FII investment,
with the largest pull out of US $ 2727 mn in January, 2008.

During 2008-09, till June 2008, FIIs have been net sellers to the tune of US $ 4,189 million.
This can be attributed to the generally weak sentiments of investors following the global
credit crisis which has engulfed the developed countries and is seen to be affecting the
developing countries as well.
 Table 193 : Net Investments by FIIs in the Indian Capital Market
(Rupees crore)
Year Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Total
Month
1 2 3 4 5 6 7 8 9 10 11 12 13 14
2005-06 -946.29 -586.82 5699.5 7390.55 4084.87 3258 -3808.31 4559.07 9615.32 5177.18 7859.26 6347.74 48650.04

2006-07 722.07 -8930.3 1781.9 1073.16 3998.05 4624.13 5805.01 7028.59 -1869.49 3184.86 4279.07 2057.05 23754.05

2007-08 4752.88 3242.2 7210 19515.3 -6476.32 19823.4 16375.6 -3052.11 5054.92 -13001 7784.26 1354.39 62583.56

2008-09 1475.95 -3378.4 -10429 -1653.81 -2808.24 -7548.91 -13461.4 -2607.45 2207.88 -3897.01 -1758.84 521.87 -43337.8

2009-10 8122.99 21115 4331.6 - - - - - - - - - 33569.3

Source: RBI

Net Investments
80000

60000

40000

20000
Net Investments
0
2005-06 2006-07 2007-08 2008-09 2009-10
-20000

-40000

-60000
India, which is the second fastest growing economy after China, has lately been a major
recipient of foreign institutional investor (FII) funds driven by the strong fundamentals and
growth opportunities. According to analysts, the late revival of monsoon, upward revision
of economic growth from 5.8 per cent to 6.1 per cent, better-than-expected performance
of companies in the quarter ended-June 30, the new direct taxes code, leading to savings in
the tax payer’s money, and the trade policy with an ambitious target of US$ 200 billion
exports for 2010-11 have all revived the confidence of FIIs investing in India. Both
consumption and investment-led industries linked to domestic demand, such as auto,
banking, capital goods, infrastructure and retail, are likely to continue attracting FII
funds.

FIIs have made net investments of US$ 10 billion in the first six months (April to
September) of 2009-10. Major portion of these investments have come through the primary
market, more than through buying via secondary markets.

Earlier, FIIs’ net investments in Indian equities crossed the US$ 8 billion-mark in
calendar year 2009, the first time in this year, with foreigners buying stocks worth
US$ 274 million on August 28, 2009. With FIIs holding 16 per cent of India's biggest 500
companies and increasing growth of the economy, the FII sentiment is expected to remain
positive towards India. At the end of July 2009, net inflows from FIIs stood at US$ 7.3
billion.

With FIIs increasingly investing in the country's construction sector, the market
capitalization of FII investment in construction has gone up by a substantial 422 per cent in
the past six months. Further, till September 8, FIIs registered a net investment of US$ 8.38
billion in the domestic stock market. The total FII market cap in 13 leading sectors was
US$ 92.5 billion.

Private equity (PE) and venture capital (VC) investments increased nearly 10 times
from US$ 30 million in 2006 to US$ 300 million by 2008, says a report by Ernst and
Young. It further said that PE / VC players had invested US$ 527 million in the
construction sector—24 per cent of the total transaction value in India for the period
January 2005 and July 21, 2009.

Along with construction, the market cap of FII investment in infrastructure and heavy
engineering has also risen, largely due to higher government spending and leveraged
investment by companies in these sectors. In heavy engineering, FII market cap has gone up
202 per cent and in steel, it was up 274 per cent in the past six months.

In the previous April-June quarter, initial signs of recovery in world economies, a stable
government in New Delhi and the positive impact of its stimulus packages substantially
improved the sentiments of FIIs. Real estate, banking and finance, engineering and oil and
gas—garnered almost three-fourths of the money invested by FIIs. These four sectors
accounted for over 71 per cent of the total FII investment at US$ 4.55 billion during the
quarter.
Some Government initiatives:
India’s foreign investment policies allow foreign direct investment up to 26 per cent and
foreign institutional investments of (an additional) 23 per cent in stock exchanges.
Under the regulation, FIIs have been allowed to acquire shares of unlisted stock exchanges
through transactions outside a recognized stock exchange provided it is not an initial
allotment of shares.

The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI)
have jointly unveiled norms enabling exchange-traded interest rate futures (IRF). Foreign
portfolio investors have been allowed to trade in IRFs, but limits have been put in place to
keep their influence under check.

FIIs and the non-resident Indians (NRIs) are allowed to invest in Indian Depository
Receipts (IDRs), according to the operational guidelines issued by the RBI on July 22,
2009.
Investment Scenario:
 American fund houses such as Direxion Shares and Direxion Funds, managed by
Rafferty Asset Management, have launched five more India-specific exchange-traded
funds (ETFs) to tap the growth potential of Asia’s third-largest economy. ETFs are
open-ended funds that are designed to track specific indices and trade just like any
other stock. ETFs have become big investors in India, basically because the US retail
investor has accepted India as part of his global equity portfolio, according to the
Singapore-based Helios Capital Management.

 The Aureos India Fund, an initiative of Aureos Capital—a Mauritius-based private

equity fund management company—and ePlanet Ventures, a global venture capital
firm headquartered in Silicon Valley, together have invested US$ 16 million in
Continental Warehousing Corporation (Nhava Sheva) Ltd (CWCNSL).

 International Finance Corporation, a member of the World Bank Group, has proposed
to be an investor in South Asia Clean Energy Fund (SACEF) by investing US$ 20
million. The fund is an Alberta, Canada limited partnership and will target companies
located in India amongst others.

 J P Morgan Securities and Morgan Stanley & Co have jointly invested US$ 103
million in the ADS (American Depositary Shares) offering of Sterlite Industries.

 Shareholding pattern (April-June quarter) of public sector unit (PSU) companies

reveal that FIIs have been big buyers in PSU banks. FII holdings in Central Bank,
Vijaya Bank, Union Bank, IDBI Bank, Indian Overseas Bank, SBI and term lenders
IFCI and IDFC have gone up significantly during the first quarter of FY 2009-10.

 A clutch of foreign and domestic institutional investors and mutual funds have
acquired stakes in engineering firm Texmaco—a K K Birla group company—through
a recently completed US$ 37.3 million qualified institutional placement (QIP).
 Canadian investment firm, Urbana Corporation, is likely to buy a 5 per cent stake in
the National Stock Exchange, India’s largest bourse.

 Overseas fund, Norwest Venture Partners, has signed an agreement to acquire 2.11
per cent state in NSE for US$ 52.6 million, valuing the exchange at over US$ 2.53
billion.

 The US-based private equity fund major, Fire Capital, has earmarked US$ 500
million equity investment to be spent over a period of five years on various realty
projects, particularly on integrated townships, across the country.

 Investors, such as ATE Enterprises, Denmark-based Best Seller, Sequoia Capital, the
Netherlands-based Cordaid etc., from the US and European countries are keen to
invest around US$ 420.84 million to promote and equip small and medium
enterprises engaged in green business, according to New Ventures India (NVI).
The Road Ahead:
Venture capitalists are expected to increase their investments in India over the next three
years, according to Deloitte's 2009 Global Venture Capital survey released recently. About
43 per cent of the 725 respondents to the survey said they expect to increase their
investments in India over the next three years.

India is well placed to attract FII flows over the long term. According to Sandip Sabharwal,
CEO, Prabhudas Lilladher Markets, “As economic growth accelerates and tax compliance
improves over the next few years, fiscal deficit will come under control. FII flows into India
will continue to be strong.” India may also get its fair share of inflows by way of increased
allocations made to BRIC (Brazil, Russia, India and China) countries as “the group will
continue to hold the interest of long-term investors”, says Andrew Holland, CEO-Equities,
Ambit Capital. Corroborating this, the dedicated BRICs Equity Funds, as tracked by EPFR
Global, are improving investment inflows.
Global movement of FIIs
Foreign investors are selling in China and India, and buying in Russia. The sale in India
has, however, been negligible compared to China. According to the Merrill Lynch Survey
of Fund Managers for August, “China growth expectations have slipped again in August to
49 per cent from 62 per cent in the previous month. This has led to investors selling China.”

The percentage for overweight was around 30 in July, which has fallen to just around 5 in
August. The overweight for Russia has however been doubled from 22 to 44 between July
and August, as per data available from the results of the survey.

The survey, in which 177 fund managers managing $370 billion worth of assets have
participated, says that “a big rotation has been happening in the emerging markets and funds
have been moving away from Asia.” The reason, fund managers said, was that “Chinese
equities were close to neutral now in the emerging markets portfolios. The most favoured
markets are growth/liquidity plays such as Russia, Turkey, and Indonesia.

The least favoured are the defensive markets such as Chile, Malaysia and Israel.”

The survey results turned marginally overweight for India in August from underweight in
July despite monsoon fears. This is perhaps because FIIs still see some more opportunities.
FIIs sold shares worth Rs 4,840 crore in the secondary market, but taking into account their
investments in the primary market (IPOs and QIPs), the net sell was only Rs 697.90 crore.

The shift in the portfolios of FIIs has been visible in the indices. The Chinese market was
among the best performers in the last six months, but has been falling over the last three
weeks.

The index is now down by 14.7 per cent from its peak achieved on August 4. Among the
other BRIC markets, Brazil is stable while India is down just 4.3 per cent and Russia down
a little over six per cent.

An FII representative said that Russia had growth potential due to the commodity boom.
The concern in China is that the growth story might get punctured sooner than expected and
the Chinese authorities have indicated there might be some monetary tightening, which
might lead to further selling.

Though the Indian index has fallen only 4.3 per cent from the peak of the month, a fund
manager with a leading US-based FII said that he expected the Indian market to correct
more, as the poor monsoon would have an adverse impact on the country’s economic
fundamentals.
“One of the reasons why India has not fallen much is that it is under-owned by institutional
investors.”

And this may be right, as the Morgan Stanley Capital Index benchmark portfolio for India is
10.7 per cent, but the average investment is lower than that. He said many funds in Asia
were underweight on India earlier. That situation may change as the market has been stable
for some time.
Conclusion:
In the past four years there has been more than $41 trillion worth of FII funds invested in
India. This has been one of the major reasons on the bull market witnessing unprecedented
growth with the BSE Sensex rising 221% in absolute terms in this span. The present
downfall of the market too is influenced as these FIIs are taking out some of their invested
money. Though there is a lot of value in this market and fundamentally there is a lot of
upside in it. For long-term value investors, there’s little because for worry but short term
traders are adversely getting affected by the role of FIIs are playing at the present. Investors
should not panic and should remain invested in sectors where underlying earnings growth
has little to do with financial markets or global economy.

It is always good to keep an eye on what the big movers are doing and plan individual
strategy accordingly. There are several reasons on FIIs selling, but there are three
predominant factors that are cited as being largely responsible.

1. The swings in the market forced several FIIs to withdraw from India and invest their
dollars in other emerging markets. Some of the other markets include Uruguay, Russia, the
Ukraine, and several other former Soviet countries. Though there have been swing’s in the
past too but FII response this time was different because of margin pressures back home as
even they have to provide regular returns to their investors.

2. The Indian markets are not seen as a good short-term bet any more. India is seen as a
good investment for the medium to long term. FIIs seem to fear the pace of growth and the
fundamentals of the markets.

3. Most FIIs are looking at corporate governance and execution abilities, which could be
significant drivers in creating a strong portfolio of Indian stocks. Recent action taken by the
market regulator indicates that the Indian government would like to moderate the inflow of
FII money.

Though valuations are very attractive on a selective basis, but stock picking has to be done
based on evaluation of business fundamentals. The subprime issue and problems in the
credit markets have raised concerns about potential growth slowdown in the US and
Europe. The fear of a slowdown will likely continue to weigh on markets average FII
redemptions in India have been lower than in other Asian economics. FIIs do get affected
by it. India is among the economies less sensitive to a deceleration in US growth and one
should not be perturbed by FII flows in either direction. One need not worry much about the
volatility of the market as it is influenced by temporary factors but the Indian story is still
strong. Markets cannot go in one direction all the times (upwards) which it was going.
Volatility is too good for the market as it helps in keeping the economy cycle moving and it
will again help the values of the stocks at a fair price for investments to again keep flowing
and so will the FIIs too.
References:
1. Niraj

Website:
www.google.com : Flag Blog
2. Payal Jain

Newspaper:
Business and Finance
3. India Brand Equity Foundation

Website:
www.ibef.org
4. National Stock Exchange

Website:
www.nseindia.com
5. Equity master

Website:
www.equitymaster.com