FIIs going for a short term play on India; even long-term investors are moving out: Himanshu Srivastava, Morningstar
In May, we recorded the highest selloff by FIIs in 18 months. In June till now, FIIs are net buyers. Today, we are expecting a rate hike in the United States. What are your expectations as far as FII flows go?
The last few months has been a bumpy ride for FII investments. In January, February, March and April there have been huge fluctuation in terms of net flows. So, in January we saw a $2 billion net inflow; in February there was $1.8 billion of net outflow. Again, it was like a roller coaster ride for FII flows. In May again, we saw a huge net outflow happening.
A lot of focus for FIIs has been on the short-term trends that are emerging, like how the crude is reacting, how currency is depreciating, what is the relationship between US and North Korea etc. On the domestic side, they are focussing on general elections, on how the state elections pan out, revival of economic growth and revival of earnings.
These are moving factors. The shift from positive to negative and negative to positive at regular intervals is how we can track the FII flows. We feel it has been short-term tactical play that they are doing at this point in time rather than a long term one. In the long term, money is also moving out from Indian markets and that is a matter of concern.
I think this trend of FIIs going for a short term play on India rather than going too long on the Indian markets and the Indian economy will continue for the next few months.
What about the DIIs? It has been a DIIs market. Do you think that trend is likely to continue? We have seen a lot of volatility and global cues, Back home, the fundamentals are not looking as good as they were a few weeks ago?
It has been a DII market for some time now, Last year it was a DII market although we had healthy FII flows as well. However, DIIs definitely outpaced them. What we need to understand is the investment pattern of FIIs and DIIs.
For FIIs, India is one of the many countries where they can invest in. So they continue evaluate India with comparative countries and see what proposition India is offering them. If they do not find much opportunity in India, then they have the option to move out of the Indian market and invest somewhere else.
For DIIs, India is the focus area so the DII flows have been good so far. They have invested roughly around $8 billion in the first six months of this year and I believe that trend will continue and that is a positive trend. It provides a much needed stability to the Indian markets and our dependency on FII flows is lessened by DII involvement. Thats why we can see that despite FIIs moving out of the market, the markets have been sort of stable. They are not fluctuating as much as they used to fluctuate earlier.
How are you comparing the first six months of this year vis-à-vis the first six months of last year? What is the kind of trend that you can spot for us? Has there been a dip or any kind of correlation?
Frankly speaking there is no comparison as such. This year, so far in the first six months, the net inflow that we have received is $0.01 billion from FIIs whereas around the same period last year, the net inflow was around $8 billion. So, there is a massive gap. If we see a few more outflows or net outflows from the Indian markets, the net outflow figure would be negative for this year.
The factors that are actually contributing towards net outflow are very obvious. One of the major reasons that we can see is a lot of money is moving out of India focussed funds and ETFs. In fact, a lot of money is moving out of India focussed offshore funds as well which are considered to be long term in nature. This is a matter of concern/
So, those investors who have actually invested in India for a long term are moving out of India because they do not want to participate in the volatility that they see coming in the next few months as we get closer to some of the state elections, leading to the general election.
Also there is a concern about US Fed rate hike. iIf the US proceeds with hiking rates, the dollar may become stronger against the rupee and the depreciating rupee does not augur well for FII money in India. These are the factors that this year has impacted the net flows from FIIs.
There has been some bit of a respite in June but that trend is unlikely to pan out in the second half of the year given the existing volatility and elections around the corner. Do you think June is just an aberration and the uptrend may not continue going ahead?
Yes, I feel so because one it is too short a timeframe to conclude that it is a change in trend. In fact, yesterday FIIs were net sellers in the Indian equity markets and so far, the money that we have received is very miniscule — just $160 million.
I do not see that there is a change in trend that is happening. This month of June can be a bit more stable compared to the previous months. As long as there is uncertainty, the FII flowspattern will also be uncertain.