FIIs skip equities, shift focus to debt market in 2011

Foreign institutional investors (FIIs) are curtailing their investments in the equities market and are instead shifting their focus to debt market where they have pumped in as much as Rs 13,798.50 crore so far this year.

FIIs are giving equities a skip, owing to factors such as impending slowdown in domestic economic growth, rising inflation and high interest rate regime prevailing in the country, believe experts.

Commenting on this trend, Ashika Stock Broking Research Head- Equities Paras Bothra said "this is a natural shift from the FII or any other class of investor. With interest rate remaining astronomically high, portfolio allocation to debt market gets raised up in the overall composition of the asset allocation structure".

FIIs have so far this year have made a net investment of Rs 13,798.50 crore in the debt market, whereas they have withdrawn Rs 1,901.80 crore from the equities market so far this year, according to information available on market regulator Sebi website.

"Oil/inflation and international bad news are at centre stage and FII's keep pulling out and putting in money in accordance with news flow. Happens in any market," Abhinav Dwivedi, Founder and President of Progressive Financial Ventures said.

Dwivedi further added that the shift towards debt is not permanent. In a downtrend, offloading equities is normal.

The Bombay Stock Exchange index, Sensex, has dived 9.78% from the peak of 20,509.09 points in January this year and 12.74% from its all-time high of 21,206.77, scaled on January 10, 2008.

Going forward, FII flows are likely to remain moderate to weak because of the natural tendencies of equity market as an asset class becoming unfavourable with high interest rate regime, Bothra said adding that recent political and corporate fiasco has also kept FIIs on tenterhooks.

Meanwhile, the number of FIIs registered with Sebi has marginally declined from 1,718 as on December 31, 2010 to 1,716 as on May 31, 2011. The number of registered sub-accounts has however increased from 5,503 in December 31, 2010 to 5,833 sub-accounts as on May 31, 2011.

FII inflow so far this year is in contrast to last year's trend, when robust FII inflow helped the Indian stock markets sustain momentum, even when the global economy continued to reel under pressure.

In 2010, foreign investors had purchased stocks and bonds worth about Rs 10 lakh crore, a record high for a year and nearly one-fifth of their overall investment so far.