FIIs unlikely to unload equities

FII investments into equities could suffer losses on the currency exchange-rate front, making it difficult for them to exit at this point

Foreign institutional investors (FIIs) are unlikely to go on an equity selling spree anytime soon. Worries the sell-off in the debt market segment might spill to the equity side as well were unfounded, market participants said.

FII investments in equities could suffer losses on the currency exchange rate front, making it difficult for them to exit at this point. “If FIIs who invested even about 40 days ago exit, the losses on the currency exchange rate would be about nine per cent. It does not make sense for them to sell now. They are tied to our markets,” said G Chokkalingam, executive director and chief investment officer, Centrum Wealth Management.

The depreciating rupee, along with concern on the US Federal Reserve slowing its bond-buying programme, saw FIIs withdrawing debt investments in India. So far this month, FIIs have net sold about $1 billion on the equity and debt fronts. On the debt side, they net-sold $1.2 billion, while on the equity side they net bought $220 million.

“We have not seen any strong indication of FIIs selling in the Indian markets. Through the past two weeks, when the rupee corrected about four per cent, FIIs have been net buyers of equity by about $800 million. So far, FIIs have reposed their faith in the Indian markets,” said Abhay Laijawala, managing director and head of research, Deutsche Equities India.

Concern over the rupee’s sudden sharp fall has made FIIs jittery about their debt investments in India. In the last two years, the rupee has fallen 32 per cent. Since May this year, it fell 8.24 per cent.

Analysts say hedging positions, too, aren’t viable for FIIs, owing to the high premiums involved. “FIIs look at hedging in the short term — one or two months. But hedging positions for a one-year period will significantly add to costs, owing to the high premiums,” said Chokkalingam.

Market participants said while the rupee’s depreciation was a concern, this phenomenon wasn’t restricted to India. Currencies of all emerging markets have been under pressure, owing to the strengthening of the dollar. “Among FIIs, there has been a general rush to withdraw from emerging markets. It is not just the rupee, but also other emerging market currencies that saw an impact of this. With the withdrawal of QE3 (third round of quantitative easing), dollars would flow back to the US. This trend of FIIs selling debt in India would continue for some more time,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

“If the US treasury yields are improving, the spread between these and domestic markets wouldn’t be very attractive for them (FIIs). Having captured the arbitrage, they are now moving out. QE3 may be withdrawn and the US economy is doing well, due to which interest rates there would start rising,” said Ramesh Kumar, senior vice-president (debt), Asit C Mehta Investment Interrmediates.
TIED TO THE INDIAN MARKET

• If they exit, FII investments in equities could suffer losses on the currency exchange rate front
• So far this month, FIIs have net sold about $1 billion on the equity and debt fronts
• On the debt side, they net sold $1.2 billion, while on the equity side they have net bought $220 million
• Analysts say hedging positions aren’t viable for FIIs, owing to the high premiums involved