Pitted against the double-whammy of falling rupee and plunging share prices, foreign investors are estimated to have taken a hit of over Rs two lakh crore in 2011 on their investments in Indian stock markets.
Once a darling of overseas investors for its impressive returns, the Indian equity market turned into a money-guzzler for institutions from abroad in 2011, and the outlook does not seem bright for the new year as well.
It is not the amount of the net outflow by FIIs (foreign institutional investors) alone, which makes 2011 a bad year for Indian stock markets.
The quantum of losses suffered by FIIs were also large and the depreciation in their investment value was also much larger than that for the domestic investors, owing to a plunge in the rupee valuation against the US dollar and other foreign currencies.
According to market regulator Securities and Exchange Board of India (Sebi), FIIs purchased stocks worth more than Rs 6 lakh crore during 2011, but sold shares worth a higher amount -- resulting into a net outflow of over Rs 2,700 crore for the year.
In comparison, Indian equities had witnessed a net FII inflow of over Rs 1.3 lakh crore in the previous year, 2010.
Also, FIIs took a hit of 36% on their investments during 2011, as measured by the movement in the BSE's Dollex inidex (which tracks the barometer index Sensex in the US dollar terms for foreign investors).
Taking into account a gross purchase of shares worth Rs 6.11 lakh crore by FIIs in 2011, the total hit for them is estimated at over Rs two lakh crore. They accounted for about 10% of total losses of Rs 19.45 lakh crore for the entire stock market.
The capital poured in by the FIIs has often been called 'hot money' because of its unpredictability, but these overseas entities have still been among the most important drivers of Indian stock markets.
During 2011, the FIIs were seen shifting their loyalty to the debt market and infused Rs 42,067 crore. This helped India get a net FII inflow of Rs 39,353 crore for the year, while taking into account both stocks and debt securities.
Fears of a global economic slowdown and domestic troubles with inflation, interest rates, lack of reforms and the falling rupee all collaborated to make the foreign investors cautious in 2011, the experts said.
Destimoney Securities' Managing Director and CEO Sudip Bandyopadhyay said, "Euro zone worries have pushed the Indian market into risk aversion mode and other emerging countries are performing better than India, so FIIs are staying from our market."
Ashika Stock Broking Research Head- Equities Paras Bothra said, "This is a natural shift from the FIIs or any other class of investor. With interest rate remaining astronomically high, portfolio allocation to debt market gets raised up in the overall composition of the asset allocation structure."
Experts also said that outflow was seen in most of the sectors, but interest rate sensitive segments like auto, banking and realty were among the worst hit.
"Almost all the sectors saw pulled out barring FMCG and some of the blue-chip stocks. In addition, the rate sensitive stocks like banking, realty and auto were severely hit," CNI Research Head Kishor Ostwal said.
Speaking about the new year, Geojit Financial Services' Research Head Alex Mathew said: "I am not very optimistic for the next year... FIIs will continue to pull out capital at least in the first half-of 2012... Besides, any investment will depend on government and RBI policies."
Angel Broking's MD Lalit Thakkar said that the FII selloff could come to an end only after a solution was reached on the eurozone front and there was some positive news on the domestic economic policy front.
A saving grace during 2011 has been a continued rise in the number of FIIs present in the country. At the end of 2011, there were a total of 1,767 FIIs and 6,278 sub-accounts in the country. The number of FIIs increased by about 50 and that of their sub-accounts by more than 750 during 2011.
The net outflow of Rs 2,715 crore ($358 million) by FIIs from the stocks was the second highest withdrawal since 1997. The FIIs had pulled out a record Rs 52,987 crore from the equities in 2008, when the US financial crisis had sent tremors around the world affecting Indian market too.
This has taken the overall gross purchases by FIIs so far in the country to close to Rs 56 lakh crore. After taking into account gross sales worth Rs 50 lakh crore by FIIs so far, they have made a net investment of over Rs 5.65 lakh crore ($128 billion) since markets were opened up for them in 1992.
This includes about Rs 4.44 lakh crore ($102 billion) in stocks and the rest Rs 1.2 lakh crore ($26 billion) in debt securities.