Sovereign, pension funds ease back, but FPIs don't

Crude oil prices, anticipation of US central bank action hit fund allocations

The latest pension and sovereign wealth funds data show that they account for a lesser proportion of the overall foreign portfolio investor (FPI) holdings than they did in the previous month. This was also true for the previous month, and the month before that.

These long-term investors' share of the overall investment pie has declined every month since September 2014. They now account for 14.43 per cent of the total FPI holdings. Such funds typically invest for the long-term and are considered a stable source of capital, unlike hedge funds or other investors who quickly move in and out of markets for a profit. They accounted for 16.7 per cent of the total FPI holdings in September 2014.

The depository data show total foreign portfolio investor holding in May (the latest available data) was Rs 20.78 lakh crore. Sovereign funds accounted for Rs 1.58 lakh crore. Pension funds accounted for Rs 1.41 lakh crore. The two categories accounted for Rs 3.06 lakh crore in September 2014. The latest figure is Rs 2.99 lakh crore.

Foreign investor holding rose from Rs 18.36 lakh crore to Rs 20.78 lakh crore in the same period.

This comes even as passive funds have begun to dominate flows into India. As much as 57.45 per cent of the total India inflows for the current calendar year has been through exchange traded funds (ETFs), according to data from fund-tracker EPFR and Kotak Institutional Equities.

 

These funds account for $3.018 billion of the $5.253 billion in total flows for the calendar year till May, according to Kotak Securities’ May 11 Foreign fund-flow tracker report authored by analyst Saifullah Rais.

The recent correction in crude prices may have had an impact on the fall in sovereign wealth fund allocations, according to Anand Shanbhag, Head Research, Tata Securities.

“A large part of sovereign wealth funds are part of the oil exporting countries whose surplus has been impacted by the fall in crude oil prices,” he said.

Some institutional investors might have taken a position in anticipation of the Federal Reserve, scaling back the availability of easy money. They are set to raise interest rates in this calendar year, according to him. However, foreign investors are likely to continue investing so long as the growth story is intact, he added.

“There are perhaps only four or five major oil producing countries who can manage to balance their budget at such low oil prices. They would have to cut down on expenditure,” said independent market analyst Anand Tandon.

Brent crude prices were trading below $53 a barrel on Tuesday.

Oil prices are expected to remain subdued for now, according to Motilal Oswal Securities 22nd July Oil and Gas report authored by analyst Harshad Borawake. Shale would play a role in determining prices.

“In the last 10 months, crude oil price has declined by over 50 per cent without a decline in demand. Crude price decline of such magnitude was seen only twice in the last three decades and only once along with economic recession…. shale oil’s short discovery-to-production period and improving economics will elongate market share battle, keeping oil prices subdued in the medium term, in our view,” it said.