Foreign Portfolio Inflows Drop 71% In 5 Months

The consistent negative developments in the country has drastically reduced foreign portfolio investments during the current calendar year. Foreign portfolio investment flows into India have declined sharply by 85 per cent in May from a year earlier, as foreigners pared exposure to domestic equities out of concern over peace and security issues in the last week of May.

According to Securities and Exchange Board of India (Sebi) data, during the first five months of calendar 2002, foreign inflows dropped 71 per cent -- to $645.5 million from $2.2 billion in the same period last year.

Triggering the decline is the threat to domestic stability aroused by the Hindu-Muslim riots which began in February in Gujarat -- India's second-most industrialised state -- and fear of war breaking out with nuclear-rival Pakistan.

 

The FII investment in equity market had been net inflows though marginal and net sellers in debt mart, they have been net sellers in the debt mart till 27 May. The tables turned in the last three days of May with FIIs selling heavily in equity and going overdrive in buying debt papers.

"The trigger point for selling equities in the last three days was partly due to rebalancing of portfolios in line with the second stage of Morgan Stanley Capital International (MSCI) Index which became effective from May 31," sources said.

On the other hand, the heavy selling in debt mart in the last few days of the month had more to do with the drop in the forward premiums, which declined to about 6-6.5 per cent as against 8-8.5 per cent in the beginning of the month. Generally, it has been observed that foreigners tend to sell in the debt mart when forward premiums increase and vice versa, sources said.

"The recent scam in the debt market and no likelihood of drop in interest rates has accentuated the FII selling spree in the debt market," head fixed income of a leading joint venture mutual fund said.

Though FII portfolio inflows have been buoyant since 1995 (with the exception of 1998-99 when net portfolio flows turned negative), the inflows have been primarily in equity and not debt.

After witnessing a relatively better interest in the debt mart in past two years, foreign investors had turned negative. Last year, a fall in forward premiums had opened the floodgates for foreign debt investments in the new millennium. Significantly, the trend witnessed in FII debt was in line with what had been happening in the G-Sec market.

Foreign funds owned a total of $15 billion of Indian assets, both stocks and bonds, as of May 31, according to Sebi. While that is just a fraction of the $1.2 trillion value of the nearly 10,000 stocks listed on the Bombay Stock Exchange (BSE), the influence of foreign investment flows is greatly magnified by a single fact.

Foreign funds are active investors in the 50 most heavily traded stocks. Those 50 stocks accounted for 81 per cent of the turnover by value on the BSE in the past year to March, according to the BSE's statistics department.

In May, foreigners remained net investors in Indian securities, but just barely and due entirely to buying of Indian bonds, the Sebi data shows. Foreigner holdings of Indian securities increased by $24.9 million, down steeply from a $166.1 million inflow in May 2001.

Foreigners were net sellers last month of Indian equities, paring their holdings by $35.2 million. They remained net buyers of Indian bonds, acquiring $60.1 million more than they sold.

In the January-May period, foreign holdings of Indian equities increased $530.8 million, down sharply from $2.2 billion in the same five-month period last year.

Day-by-day data shows foreign investors were particularly spooked by indications last week the Indo-Pakistan crisis was escalating into a nuclear showdown.

Foreign funds made their biggest single-day equity sales of 2002 late last week after Pakistan's ambassador to the United Nations said Islamabad was prepared to respond with nuclear weapons if attacked by India, which has significantly more conventional military firepower.

Both countries have subsequently tried to quell concern of a nuclear war breaking out, with the leaders of both countries this past weekend saying such a development was unthinkable.