Quality of FII flow improves

BNP Paribas says inflow in July-September came from more ?regular? sources

The profiles of foreign institutional flows into Indian equities saw a change in the quarter ended September, as the slew of pro-business measures by the government encouraged more global funds to invest in stocks in India, according to a report released on Monday by BNP Paribas Securities.

In August, BNP Paribas Securities had questioned the type of foreign institutional flows into the country’s stocks before July. BNP’s Manishi Raychaudhuri had said there was a large component of ‘other’, unexplained inflows. This had sparked a debate on Dalal Street about the possibility of round-tripping into Indian stocks. Round-tripping involves routing of illicit money of resident Indians back into the country to avoid taxes. The money is usually routed through tax-friendly nations, such as Mauritius.

Now, Raychaudhuri says sources of FII flows have changed slightly — more flows are being recorded under ‘regular’ sources. Flows from ‘other’, or unexplained, sources declined from 50 per cent in the first half this year to about 20 per cent in the quarter ended September, he said in the report released on Monday.

Regular sources refer to global emerging market and Asia funds, while the ‘others’ category includes global funds, hedge funds and sector-specific and sovereign wealth funds. In August, Raychaudhuri had said, “While it includes a combination of hedge funds, sovereign wealth funds and sector funds, such a large quantum of money coming from non-regular sources lends credence to the oft-repeated conspiracy theory that a lot of FII (foreign institutional investment) flows into India are, in reality, Indian money disguised as FII money.”

According to data by the Securities and Exchange Board of India, so far this year, foreign institutions have pumped in about $19 billion, or Rs 99,000 crore, into Indian equities. Since July, the benchmark Sensex has gained about seven per cent, while so far this year, it has risen about 19 per cent.

“Increased participation of the GEM (global emerging market) and AxJ (Asia-ex Japan) funds would underscore the importance of global liquidity, as these funds are the primary recipients of inflows arising from liquidity injections,” Raychaudhuri said in the latest report. In the quarter ended September, various developed economies’ central banks, including the US Federal Reserve and the European Central Bank, introduced many steps to keep markets flush with liquidity, part of which flowed into equities in emerging markets such as India.

Analysts said the fact that P Chidambaram took over as finance minister in early August helped revive foreign institutional inflows into Indian stocks. This, coupled with reform measures such as a rise in diesel prices and allowing foreign direct investment in multi-brand retail and aviation sectors, lifted investor sentiment.

BNP Paribas said the conclusion that investors from Asia-ex Japan were the primary contributors to FII inflows into India would appear surprising if one considers the flows into these funds from investors. “While GEM funds have received considerable flows (a little more than $5 billion) in the third quarter, Asia-ex Japan funds have actually seen investor redemptions ($2.9 billion). And, despite the loss of funds, among FIIs, they are the largest investors in India,” it said. “Pure fund inflow is, therefore, not the only reason for the FII investment in India. FIIs have preferred India over other emerging and Asian markets, and we believe the reason lies in India’s relative earnings stability,” it added.