FII fund flow dips after 3-year boom

At $4 billion, inflows set to be lowest since 2011; past 3 years have seen an average of $20bn each

In 2015, foreign fund flows into Indian stocks have been the lowest in the past four years. Fears of global slowdown and uncertainty over interest rate increase by the US Federal Reserve have seen foreign investors scale back their investments to riskier asset classes such as emerging market (EM) equities.

So far this year, foreign institutional investors (FIIs) have invested a little over $4 billion (Rs 23,787 crore), barely a third of their average investment in the first nine months of the past three calendar years.

With the nearing of a rate increase by the US Federal Reserve, analysts don't rule out further tapering of foreign flows in the remaining 50 trading sessions of the year.

"This year hasn't been great for emerging markets. Most of these are in distress and India, too, is getting bracketed with them," said UR Bhat, director, Dalton Capital Advisors.

Flows into the Indian markets are impacted by the allotments made to the entire EM-pack by investors in the US or other developed world. Investors from the US have pruned their exposure to EMs.

"Tapering of flows this year isn't an India-specific phenomenon. US equity funds and global EM funds have seen huge outflows. Investments into equities have been seen coming off this year. Given the situation, $4 billion of inflows should be considered positive," said Sandip Sabharwal, former fund manager and independent analyst.

At the peak, FII inflows into Indian stocks stood at $8.5 billion during mid-April. Between April and July, Indian markets saw muted flows. However, China's surprise devaluation of the yuan in early August saw a huge exodus of flows from the Indian market. The previous two months witnessed record outflow of $3.8 billion. Foreign investors started pulling out money from the Indian market, as most EM currencies began falling against the dollar.

According to experts, another reason for slowing of funds into markets like India is a steep decline in oil prices, which have led to a sharp drop in investable surpluses with oil-rich countries. Oil prices are currently half of what they were a year ago. Oil producers run some of the world's biggest sovereign wealth funds and are also big investors into passive investment vehicles like EM exchange-traded funds (ETFs).

"Most sovereign wealth funds have been withdrawing their investments. Most of their investment calculations were done when oil was above $100 a barrel. With prices crashing, they aren't left with much to invest," said Bhat.

Experts say if world growth continues to remain sluggish, India might not see robust flows like the previous three years. This could be a worrying signal, as the direction of the Indian market is largely determined by FII flows.

For instance, India's benchmark indices doubled between 2012 and 2014, thanks to inflow of $20 billion in each of the three years. Similarly, in 2011, the markets had corrected 25 per cent as FIIs pulled out money. So far this year, too, the Indian benchmark indices are marginally negative, as flows have tapered. Strong flows from domestic investors, especially mutual funds, have cushioned the fall in the market.

Thanks to robust inflows into equity schemes, mutual funds pumped in nearly Rs 57,000 crore into Indian stocks in 2015.

Experts say for the markets to continue to attract institutional flows, the reform process and recovery in corporate earnings would be critical.