FIIs pull out $2 bn this year, highest since 2008

Continued outflows amid moderation of domestic investments are a concern

At nearly $2 billion, foreign investors' pullout from the Indian market so far this year is the steepest since the 2008 global financial crisis. Concerns over the health of the global economy have triggered a risk-off mode among global investors, who have been withdrawing money from riskier assets and moving to safety of gold or developed world bonds.

According to data provided by the Securities and Exchange Board of India, foreign institutional investors (FIIs) pulled out $1.8 billion (or Rs 12,775 crore) from the Indian market between January 1 and February 5. They had taken out another $100 million (Rs 680 crore) from the markets this week, taking the selling tally to $1.9 billion.

FIIs had pulled out nearly $3 billion (Rs 11,805 crore) in the same period of 2008. In rupee terms, this is the worst-ever FII selling for the Indian markets during the start of a new year.

Market experts believe given the turmoil in the global financial markets, selling by foreign investors is unlikely to subside.

Ravi Muthukrishnan, co-head of research at ICICI Securities, said FII outflows might persists till at least until March 2016. "In line with other emerging markets (EMs), the FII flows into Indian equities may continue to remain weak in Q4 of FY16… in the best case scenario of reduced volatility in global equity markets, India - with its relative strong fundamentals - can be a favourable destination for stable foreign portfolio investors (FPI) flows," he said in a note.

Risk aversion has seen global investors pull out money from across emerging markets, but the intensity of selling has been one of the highest in India. According to Bloomberg data, FII selling in other regional markets such as Indonesia, the Philippines and Taiwan has been relatively subdued at less than $500 million.

"Right now, investors have multiple concerns surrounding EMs, what is happening with China and the currency devaluation. All of this leads to a risk-off sentiment towards the EMs, and India has got impacted too," Aashish K Mishra, head of securities and fund services, Citibank India, told Business Standard recently.

The FII selling pressure is because of redemption pressures faced by global equity funds, particularly those focused on emerging markets. EM equity funds have seen redemptions for 14 straight weeks, as per data provided by fund tracking firm EPFR. Money has been seen flowing into US treasury in recent weeks. In India too FII outflows from the debt market has been relatively muted at less than $500 million this year.

So far this year, the impact of FII outflows has been largely offset by domestic investments. However, it remains to be seen how long the trend would continue as retail flows into mutual funds (MFs) have been moderating.

Inflows into equity MFs at Rs 2,900 crore in January were the lowest in 20 months and less than half of the average monthly flows in 2015. "Continuing issuance of tax-free bonds (Rs 34,300 crore in January), appreciation in gold prices and weakness in mid cap index are likely factors impacting inflows into local MFs," said Deutsche Bank analysts Abhishek Saraf and Abhay Laijawala in a note on Monday.

"Multiple factors are coalescing together to render environment for inflows into MFs difficult in the near term. We believe the ongoing volatility in equity markets and a consequent underperformance of mid cap index in 2016 till date will likely impact sentiments for domestic retail investors as it correlates strongly to performance of mid cap index," they further said.

Gold prices are up over 10 per cent so far this year, while benchmark indices are down nearly eight per cent.