FIIs pull out of stocks, debt in July

Worry at US Fed policy & uncertain economic prospects; so far this month, FIIs have been net sellers at around Rs 18,400 crore

Foreign institutional investors (FIIs) have dumped both Indian stocks and bonds this month, on worry that the US Federal Reserve would roll back its massive bond buying programme later this year and yields would remain elevated. In the month so far, these have been net sellers at around Rs 18,400 crore across both the equities and debt markets.

Brokers and analysts said the weak outlook for the rupee in the wake of comments by the US Fed that the third round of bond buying, known as Quantitative Easing (QE3), could be cut had made FIIs nervous about emerging markets. This, coupled with uncertain economic prospects, is prompting foreign investors to cut exposure to India.

"On the debt side, the yields are not favourable for FIIs to come in, while on the equity side the likelihood of QE3 coming to an end is getting stronger," said Prakash Diwan, director of Altamount Capital Management.

Analysts said even the Reserve Bank of India's two separate measures to arrest the decline in the rupee by tightening liquidity in the system might only have a temporary impact. "The RBI move was a reaction to the debt outflows. It was trying to bring in more flows, as these had dried up post the rupee decline," said Rahul Arora, chief executive of institutional equities at Nirmal Bang

The outflow of foreign money from the debt market was higher compared to the equities markets during the month. FIIs moved out close to Rs 12,000 crore in debt, while equities saw outflows of about Rs 6,000 crore in July

"The risk-off trade is still very much on. The situation in Europe is not very conducive for risk-taking for FIIs. Tapering of US stimulus is expected during the latter part of this year," said U R Bhat, managing director at Dalton Capital Advisors.

Since January, FIIs have net-bought stocks for about Rs 58,000 crore. In debt, these investors have been buyers worth Rs 21,185 crore.

Brokers said a huge reversal in FII inflows in the near term was unlikely. They do not expect further investments either. "Fundamentally, there is nothing for the markets to see any substantial growth. Flows will come back only once the rupee stabilises. But that will take at least one or two quarters more," said Diwan.