As per Deccan Herald this morning, India has seen the worst FII/FPI outflows in 18 years. The article highlights that the outflows are from Equity as well as Debt assets. The headline is catchy and alarming at the same time.

Possible reasons for this kind of FII exit can be many. There is a global fear of OIL price spikes, Rupee depreciation, rising interest rates in India and USA, and the general emerging market rout recently witnessed across the globe. As against the net outlfows from FII / FPIs, the Domestic investors through MFs, Insurance and PMS schemes are big net buyers in last several months. Biggest contributor to inflows is Mutual Funds SIPs which have touched a level of Rs 8000 Crores per month (approx.) The reasons for net inflows from domestic investors are also many. Real Estate is almost untouchable, Fixed Deposits are yielding low returns and Gold has also lost its charm. Besides the absence of alternate asset class, there is a general tendency among retail investors to chase the returns on the basis past performance.

Between 2009 to 2014, FIIs were very robust on india. They pumped around INR 5,19,000 Crores into equity market during the 5 years period. In 2013-14 alone, the total investment from FIIs was INR 131,000 Crores. During the same period, India MFs were actually net sellers by INR 61000 Crores. The lack of interest among domestic investors was due to strong momentum in Real Estate and Gold.

However, once the Gold and Real Estate boom got busted, domestic investors became net buyers of equity assets. Demonetisation was big booster for equity investments, and in 2016-17, MFs purchased INR 1,01,000 worth of equity assets, their highest ever. But this record was to be broken very next year. The net buying of equity by MFs is around  INR 1,21,000 Crores in year 2017-18. On the other-hand, FIIs kept slowing their investments in India. Last 4 years cumulative investment from FIIs is actually lower than their 2014 investment.

Traditionally, Indian markets have done well when FIIs buy, and they do adverse when they sell. However, this time its different so far. Domestic investors have come as a strong force and have not let the markets to correct sharply. Does it mean that we have broken from the shackles of foreign money controlling the fate of markets? I think its too early to say. Continuous outflows from FIIs has made the market move in a particular range. Also, the movement within the market is very skewed towards limited stocks. This has resulted in underperformance amongst all portfolios when compared to their respective benchmarks.

Over last 3 months, the MFs investment has also decelerated. HNI’s are either sitting on the sidelines or investing in a staggered fashion with no hurry. SIPs alone continue to be the main force. INR 8000 crores per month is good money, but I don’t think it is sufficient to prevent from possible future shocks. Last February, we saw a sample of that, when sudden global equity correction led to a correcting in Indian markets as well.

Historically, FIIs have been smart investors than domestic ones. Is it going to be true this time also? Only time will tell. Nevertheless, if the rupee depreciates further from here on, and Sensex also corrects in line with emerging g markets, FIIs can make a re-entry. I don’t think they will do it in a hurry though. We are in a election year. Our interest rates and inflation are looking up. The corporates earnings are improving. It looks like that the recovery in corporate earning is more than just a base effect. Will the recovery be strong & sustainable enough to entice FIIs back, especially when the broader market doesn’t value buying opportunities, remains to be seen !

We are cautious on the markets for next 12 months, and will continue to invest in staggered fashion !


By Sameer Rastogi

18 years of experience, PG in Finance and has delivered Wealth Management lectures at IIM Lucknow, IBS Gurgaon and IIPM Delhi. Contributed to various newspapers. Strength – Application of Economic fundamentals to Investment

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