For staunch loyalists of India’s growth story, the profiles of foreign institutional money into the country’s equities in 2012 might be a sore point. In a year that saw a record foreign portfolio inflows of over $20 billion, India-focused offshore funds did not make any contribution. On the contrary, these funds witnessed sharp redemptions from their abroad clients during the year, quashing the popular perception that foreign investors are queuing to pour money specifically into the country’s stocks.
The section of foreign institutional investors (FIIs) that contributed the most to the inflows are emerging market funds, which invest in markets such as India, China, South Korea and Taiwan, among others. This suggests foreign investors were more comfortable putting money into the nation’s stocks through emerging market funds rather than India-centric ones, say analysts.
“India has been a part-beneficiary of investors’ interest in emerging markets. The flows are not because of any major India-specific interest,” says Dhruva Raj Chatterji, senior research analyst, Morningstar, a fund tracker.
Clients have pulled $1.7 billion out of India-focused offshore funds so far in 2012, while India-centric exchange-traded funds (ETFs) have seen inflows of just about $468 million in the period, according to Morningstar. While the quantum of money that has flown into India through emerging market funds is not known, Morningstar data show US-based emerging market funds & ETFs have seen an inflow of $37 billion in 2012 (up to October).
“In the case of India-centric funds, clients need to appreciate the intricacies that drive Indian markets. Many of them are unable to understand that and are sticking to emerging market funds, easier to sell,” says Dalton Capital India Managing Director U R Bhat.
Analysts say many foreign investors had been reluctant to touch Indian stocks with a bargepole till September because of the lack of policy action to revive the economy’s sagging prospects and a controversial rule to tax those. A slew of critical news reports by international media giants, including The Economist and Washington Post, on India heightened concerns.
“The bad international press that India has received in the past year or so painted the picture that nothing is happening in the country,” Bhat says. “So, when Indian stocks deliver 23 per cent returns, clients of India-centric funds deem redeeming is the best option as of now,” he adds.
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But, a slew of pro-business reforms, including foreign direct investment in retail and diesel price increase, revived investor sentiment, though it did not stop the redemptions from India-centric funds. But, a silver lining of the government’s policy moves was that emerging-market funds increased allocation to India.
“The flows into India were because of the global liquidity, but it is important to note that India, despite lower weightages, received more money than many other emerging markets,” says IIFL Chairman Nirmal Jain.