FII outflows the most since Jan 2008

FIIs pulled out about Rs 16,700 cr from Indian equities in August, sending the BSE Sensex down 6.5%

Amid concern over the crisis in China and a likely interest rate increase by the US Federal Reserve, selling by foreign investors in August was the highest since the beginning of the global financial crisis in January 2008.

Foreign institutional investors (FIIs) pulled out about Rs 16,700 crore ($2.5 billion) from Indian equities in August, sending the BSE Sensex down 6.5 per cent, the most since November 2011.

The selling tally for the month was the second-highest in rupee terms and the third-highest in dollar terms. In January 2008, foreign investors had pulled out Rs 17,227 crore ($4.4 billion), the highest ever, which had led to the Sensex falling 13 per cent, owing to the global financial meltdown triggered by a subprime crisis in the US.

Foreign investors are the most influential on Dalal Street and their trading activity has a huge bearing on the market.

The selling in August was largely due to fear of a China-led global slowdown, said analysts. “China, the world’s second-largest economy, contributes 14 per cent to world GDP (gross domestic product) and 50 per cent to world GDP growth,” Edelweiss Investment Research said in a note on Monday.

Adding:  “A slowdown in such a major economy is likely to have a ripple effect across the globe … This has resulted in risk aversion across the globe, with FIIs exiting emerging markets.”

In August, outflows from foreign investors weren’t restricted to Indian markets alone. According to data provided by Bloomberg, markets such as those in Brazil, South Korea, Taiwan and Thailand saw FII selling of about $1 billion each. In fact, emerging market foreign fund outflows last week were the most in seven years. Investors redeemed $4.5 million from Asia (excluding Japan) and global emerging market (EM) funds in the week ended Wednesday, according to EPFR Global.

Many experts fear in terms of foreign outflows, the worst might not be over yet, as investors will continue to remain cautious due to worry about a rate increase by the US Fed. “The broader concern behind EM outflows (weak EM growth, commodity price downside and looming Fed rate hikes) is likely to remain until either data from China decisively strengthens or the Fed rate increases are pushed off the horizon,” Mixo Das, Asia (ex-Japan) equity strategist, Nomura, said in note last week.

Edelweiss, too, believes more turbulence cannot be ruled out if global markets don’t stabilise. “Indian markets are expensively valued compared to MSCI EM. Though India remains fundamentally strong, as we have highlighted in previous notes, the spread of contagion is always a possibility,” the brokerage firm said.

Some analysts, meanwhile, believe the world market might have overreacted to concern about China. “While Chinese growth is a concern for global growth, we believe Chinese authorities have the firepower to contain downside risks. Also, other major central banks remain very supportive. In addition, investor positioning is cautious, as shown by a sharp rise in money market fund inflows. So, money could be put to work quickly if these risks are contained,” Barclays said in a note.