India clocks $196 mn from offshore, exchange funds in Q2

Foreign investors grew optimistic about prospects of Indian equities under a pro-growth, pro-reform government

After experiencing net outflows for four consecutive quarters, India-focused offshore funds and exchange traded funds (ETFs) registered net inflows worth $196 million for the quarter that ended on September.

India-focused offshore funds and ETFs saw outflows of $826 million in the April-June period this year, a report by Morningstar showed.

Offshore mutual funds are important components of total foreign institutional investment (FII) apart from other instruments, including offshore insurance companies, hedge funds, and sovereign wealth funds.

These funds can be divided into India-focused offshore funds and ETFs; and regionally diversified offshore funds and ETFs (or funds having partial allocation to India).

The data showed that of the total net inflows in the September quarter, India-focused offshore ETFs saw net inflows of $136 million, while the same in the funds category recorded net inflows of about $60 million.

"The four consecutive quarters of net outflows, prior to September quarter, from the India-focused offshore funds and ETFs category halted the post election euphoria, which started after the general elections in May 2014 resulted in the formation of a stable government," Morningstar said.

"This, coupled with signs of improving macroeconomic conditions, boosted investor sentiments and resulted in FIIs pumping money into Indian equities," it added.

It also noted that although initial inflows were primarily into India-focused ETFs, indicating a flow of predominantly short-term money, flows into India-dedicated offshore mutual funds, which are generally considered to be long-term, gathered pace later as foreign investors grew optimistic about the prospects of the country's equities under a pro-growth, pro-reform government.

"While the sentiments remained upbeat until the first half of 2015, the second half of the year led to introspection and realignment of expectations to reality," Morningstar said.

"Initially, investors overestimated the pace of economic recovery.

Later, concerns regarding the passage of important bills such as the land bill and GST dampened sentiments, triggering a sell-off," it added.

The report also said higher investments moved out of India-focused offshore equity funds this year (till September) compared with offshore ETFs, indicating that long-term investors still had reservations towards investing in the country's equities.

Meanwhile, helped by net inflows and robust markets, assets of India-focussed offshore equity funds and ETFs rose 7.5 per cent to USD 44.4 billion for the period under review.