August sees highest monthly FII outflow ever

August also saw equity markets suffer their worst single-day fall in almost seven years with the S&P BSE Sensex sliding 1,624 points in a single day

Foreign institutional investors (FIIs) have pulled out a record Rs 17,000 crore from the Indian equity market in August amid concerns over a China-led global economic slowdown. In their highest monthly outflow, overseas investors have sold a net amount of Rs 16,936 crore ($2.56 billion) thus far in August 2015, highest in rupee terms, NSDL data show.

In October 2008, the FIIs had offloaded net amount of Rs 15,347 crore ($3.15 billion) from the equity market when India suffered the after-effects of the financial crisis triggered by the collapse of Lehman Brothers in the US. In dollar terms, they pulled out of $3.3 billion (Rs 13,036 crore) from the Indian equity market during January 2008, data show.

August also saw equity markets suffer their worst single-day fall in almost seven years with the S&P BSE Sensex sliding 1,624 points in a single day. Despite the modest recovery, the benchmark is still nearly 3,680 points, or 12.3% away from its March peak levels.

The recent outflow not only saw the equity markets tumble but it also had a bearing on the rupee, which depreciated by a 4% and closed at a two-year low of 66.65 on last week.

"Weak global cues in response of data indicating slowdown in Chinese economy triggered negativity across the globe including our domestic bourses in the passing week. Besides, depreciation in rupee against the US dollar further dampened sentiment," said Jayant Manglik, President, Retail Distribution, Religare Securities.

Outlook

So what's the road ahead for the markets? Analysts expect the markets in September to be guided by the rate hike comments of the US Federal Reserve when it meets on September 16 - 17, developments related to China; and the upcoming policy review by the Reserve Bank of India (RBI).

"We see three major event risks playing out in the next few weeks that will drive Indian markets. First: will the Fed finally hike on September 17; second: will corporate earnings begin to turn around? Finally: how will Bihar vote?" point out Abhishek Gupta and Indranil Sen Gupta of Bank of America-Merrill Lynch (BofA-ML) in a recent report.

"Corporate earnings are becoming extremely important, as the hope trade in Indian equities is turning into a show-me trade. This, in turn, means that FPI equity inflows ($15 billion FY16 BofAMLe) will depend on what is happening to earnings," they add.

G. Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory believes that India is still likely to be the fastest growing economy in the world with the Indian equities, during the remaining period of FY2016, likely to outperform its peers.

"India's fiscal and external balances are improving; excise duty collection remains robust; government's plan expenditures are growing around 30%. The benefits of margins are expected to continue for several quarters. Hence, the Indian equities, during the remaining period of FY2016, are expected to outperform its peers. Having said that, the possible risk from the global deflation exists in the medium-to-long term. However, we do believe that it would be postponed by pumping a lot more liquidity in the system. We suggest our investors to focus on four themes - defensives (IT, Pharma and FMCG), margin expansions, relatively more efficient PSU banks & metal companies (other than steel), and cash-rich companies, which still make decent profits," he says.