With Indian stocks melting under the heat of a global crisis, overseas investors pulled out $3 in 2008 from every $4 pumped in the previous year, and a reversal in trend is expected only after six months.
During a year when Indian stock market lost its valuation by more than half, foreign institutional investors (FIIs) have pulled out an estimated $13 billion from domestic bourses — an amount equivalent to nearly three-fourths of over $17 billion invested in 2008.
With the stock market losing big time during 2008, FIIs seem to have shifted their loyalty to debt market in the country, where they made net purchases of over $3 billion during 2008 — a sharp surge from about $2 billion a year ago.
Analysts believe that FII inflows might pick up again in the country in the coming year after the first two quarters in 2009 as valuations of Indian stocks have become quite attractive for long-term investments.
“The FII outflow is likely to continue for the first two quarters in 2009, but the situation is likely to improve in the second half of this year. Inflows from Japan are likely to come into the domestic market as interest rates are down to virtually zero, while the launch of the Shariah stock index may also attract some funds,” Geojit Financial Services research head Alex Matthews said.
“The FII outflow is likely to gradually taper off and they will start putting in money in the coming year as valuations of Indian stocks have become attractive and the weakening rupee against the dollar would attract them to invest more in the country,” brokerage firm Bonanza Portfolio President-Research P K Agarwal said.
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The first signs of a pullback from FIIs were witnessed in November last year, when they turned net sellers to the tune of Rs 5,850 crore in equities and Rs 469 crore in debt.
Despite the heavy pullback, the grand total of funds put in the country by foreign investors from the time they were allowed to invest in Indian stocks remains positive. The year to date cumulative inflows are around Rs 230,626.50 crore.
The number of registered FIIs has also increased to nearly 1,600 at the end of 2008 against 1,219 in 2007.
The FII outflow coincided with the benchmark Sensex nosediving to below 8,000-level in October from a peak of over 21,000 in early January. After a partial recovery, the index is now hovering at around 9,300 points.
The FII outflow gathered momentum after financial giants in the US and UK collapsed amid the credit crunch being experienced by the global economy.
The impact of the credit crunch in the US and UK led to major institutional investors shoring up finances to bail themselves out from the crisis at home. Thus, they started pulling out their funds from emerging markets, including India, even as they still believe in the region’s growth story.
In October this year, the Securities and Exchange Board of India (Sebi) lifted the 40 per cent limit on investment through offshore derivative instruments or Participatory Notes. The action was taken in the light of the global financial turmoil and the impact of the meltdown on the Indian stock market.
In a move that might help in reviving the stock market, which was troubled by the global financial meltdown, Sebi is taking up a comprehensive review of the rules governing FIIs.
Further, the government has taken several measures for giving a boost to the market and the economy, and analysts believe the macroeconomic actions would give a positive trigger to the market sentiment.