FII tap will not dry up despite March hiccups

Inflows from foreign investors to continue in the short term on strong global liquidity

Despite three eagerly-anticipated domestic events in March doing little to boost investors’ sentiments, foreign investors are likely to pump money into Indian shares in the short term, as global liquidity remains strong.

The Congress’ poor show in state elections, uncertainty over the quantum of future rate cuts and an insipid Union Budget are unlikely to hurt inflows from foreign institutional investors (FIIs), experts say. The negative market reaction to the Budget, the 400 points decline in the last two sessions of the Sensex, is now in the price, they say. The 30-stock index closed down 1.1 per cent, or 192.83 points, at 17,273.37 on Monday.

FIIs have poured Rs 42,822 crore ($8.62 billion) into Indian shares till March 15, helping the Sensex rise 11.8 per cent.

“Given the fact that global liquidity is strong, money would continue to come into India,” said U R Bhat, managing director at Dalton Capital Advisors (India). “Long-Term Refinancing Operation (LTRO) money is trickling into India. About $1-2 billion inflows from FIIs per month should not be a problem.” After injecting $623 billion in three-year loans at one per cent interest in late-December through LTRO, the European Central Bank (ECB) handed out another $712.81 billion to lenders in February in a similar operation. This money is finding its way into emerging markets like India and boosting share prices.

Bhat doesn’t see any major downside for the market. “It should do well not because of economic reasons, but strong inflows. Oil de-regulation, financial recast of state electricity boards and any political realignment at the Centre will be added incentives.”

However, rising crude oil prices could act as a spoiler. Brent crude, quoting at around $126 a barrel on on Monday, has risen 17 per cent so far this year on concerns over potential supply disruptions from Iran. Rising crude oil prices stoke inflation and increase subsidy burden for India, which imports three-quarters of its oil requirements.

“With the rising oil prices, risks to economic growth are rising but our optimistic view on markets hinges on global liquidity and sustained affirmative policy action, which should improve the investment outlook,” CLSA”s Mahesh Nandurkar and Bhavesh Pravin Shah wrote in a strategy note to clients on Monday. “We expect auto fuel price rise after the current parliamentary session in early April.”

CLSA strategists, however, have reduced their Sensex target to 20,000 by March 2013, after the Budget, down from the earlier 20,800. Experts believe, going forward FIIs are likely to be more selective in picking companies and sectors.

“Margin pressure is still evident due to high nominal interest rates, rising wages and high raw material prices especially energy,” said Arjuna Mahendran, Singapore-based head of investment strategy for Asia, HSBC Private Bank. “Secondly, the probability of the government under-shooting its growth target and thereby pre-empting more financial resources from the private sector is still high.”

Mahendran expects Indian companies with strong balance sheets to continue to attract interest from foreign investors.