Heavy Selling By Fiis Under Rbi, Sebi Lens

The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) have initiated independent scrutinies into the heavy selling by foreign institutional investors (FIIs) in the equities market over the last few days. For the first time since the beginning of the new fiscal, FIIs have turned into heavy sellers and are pulling out of the market.

In the six trading days in September, FIIs have sold Rs 881.8 crore worth of stocks against purchases of Rs 644.3 crore making them a net seller to the tune of Rs 137.5 crore.

Sebi is looking into the pattern of selling to identify the reasons behind the recent sales. The market regulator is also attempting to identify the sectors where there has been concentrated selling.

The RBI, on the other hand, seems to be keeping a close watch on the slipping rupee against the backdrop of the developments in the equity market. The rupee closed at a new low of 47.35 against the dollar today. With this, the Indian currency has lost 21 paise since the beginning of the month. FIIs buy dollars from the market to convert their rupee resources.

According to sources, the RBI is not worried about the slipping rupee but it is keeping a close tab on the linkage between FIIs pulling out of the equity market and the pressure on the rupee.

There has been a progressive decline in net FII purchases in recent months. In August, net FII purchases stood at Rs 259.20 crore, down from Rs 736 crore in July. However, over the last eight months aggregate net FII purchases stood at Rs 12,086 crore, the highest since 1994. In the whole of 2000 (January-December), net purchases by FIIs stood at Rs 6,639 crore.

FIIs usually follow a pattern in their sales and purchases. Heavy purchases are normally noticed in the beginning of the calendar year while sales are concentrated at the end of the year coinciding with the redemptions and other monetary obligations which the FIIs face in their home countries. This time around, the selling seems to have started early, sources said.

"What is worrying is that they have been selling at such low levels. It does not make sense for them to book losses," sources said.

John Band of ASK Raymond James attributed the primary driver for the sales to "the total loss of confidence in the commitment of the government to the privatisation process". There are a number of seasonal factors as well, he added, which were expected to reverse towards the end of this month and decelerate the selling process.

"Our feedback is that FIIs have been actually buying high and selling low," sources said adding that this is contrary to their general practice of buying low and selling high. On Monday, trading was characterised by profit booking in pharma stocks and FIIs were known to be both buying and selling in a stock-specific manner. The BSE Sensex ended 15 points down today.

In the middle of last year, FIIs had indulged in a peculiar game of pulling out from the equities market which led to considerable instability in both the equity as well as the forex markets. The RBI had then announced a string of measures to protect the currency.