Falling crude hits fund flows from Middle East

Crude oil prices have fallen by about 50% since June this year

Falling crude oil prices have hit fund flows from West Asia into the Indian market, data provided by depositories show. According to market watchers, foreign funds backed by oil-producing countries have started to pull out money from  Indian markets.

An analysis of the assets under custody of UAE-based investors shows these increased only 10 per cent between June and November, even as the market rallied 15 per cent in this period. The growth in assets of investors from the US and Luxembourg was 17 per cent and 23 per cent, respectively in the period, according to data on country-wise assets under custody with depository NSDL.

UAE is the sixth largest contributor to Indian equities after the United States, Mauritius, Singapore, Luxembourg and the United Kingdom. Crude oil prices have fallen about 50 per cent since June. “The internal surplus in their investment corpus would come down as a result of lower revenues from oil production. To that extent, we could see a reduction in domestic as well as global flows,” said Nirmal Rungta, director at CIMB Securities.

The Organization of the Petroleum Exporting Countries (Opec) has shown reluctance in cutting supply, leaving market forces to determine prices. With crude oil prices below $60/barrel, production is becoming expensive for producing nations.

On Tuesday, crude oil was trading at $60.9 a barrel, a long way off its high of $115 in June.

Opec is expected to see a net-export revenue loss of about $250 billion in 2015, according to estimates from the US Energy Information Administration. Revenue loss of that magnitude could lead to fewer outward investments, analysts said.

“Some reduction should be expected in the investments from these countries, as they might not be left with any investible surplus following the drop in oil prices. Global fund flows will taper,” said the head of institutional equities with a domestic brokerage, who did not wish to be named.

Oil-rich countries of West Asia are large exporters of capital to the developed and emerging markets.

According to data from NSDL, the contribution of UAE to total foreign flows into both Indian debt and equities has been slowly inching downwards. From about 3.5 per cent last year, the percentage of UAE’s investment into India had slipped below three per cent as of October, the latest data available with NSDL. This is contrary to the trend last year, when contributions from UAE were on a rise. Less than one per cent of the total flows from UAE find their way into debt funds.

Experts say growth in the Indian economy, despite having slowed, is still better than in a lot of other countries, ensuring that the country finds favour with foreign investors.

“Even if the total investment basket in emerging markets remains the same, India could receive a higher share with growth in Russia and China suffering a setback. They (West Asian countries) would also want to invest in geographies where they see good growth opportunities,” said Rungta.