FIIs unlikely to go on equity selling-spree anytime soon

Worry that sell off in debt market segment may spill over into the equity side

Worries that the sell-off in the debt market segment may spill-over to the equity side as well are unfounded said market participants. FII investments into equities could suffer losses on the currency exchange-rate front, making it difficult for them to exit at this point.

“For FIIs who invested even about 40 days ago, the losses, if they exit, on the currency exchange rate itself will be close to 9 per cent. It does not make sense for them to sell now. They are tied to our markets,” said G Chokkalingam, Executive Director and Chief Investment Officer, Centrum Wealth Management.

The depreciating rupee along with concerns about the US Federal Reserve slowing down on its bond-buying programme saw FIIs withdrawing their debt investments in India.

In the month of June alone, FIIs have net sold close to $1 billion on both the equity and debt side. On the debt side, they have been net sellers at $ 1.2 billion, while on the equity side they have been net buyers at $220 million.

“We have not seen any strong indications of FII selling in the Indian markets. Over the past two weeks, when the rupee has corrected by about 4 per cent, FIIs have been net buyers of equity at close to $800 million. So far FIIs have reposed their faith in the Indian markets,” said Abhay Laijawala, Managing Director and Head of Research, Deutsche Equities India.

Concerns over the sudden sharp fall in the rupee has made foreign institutional investors jittery about their debt investments in India. The rupee has fallen by close to 32 per cent in the last two years. Since May alone, the rupee has fallen 8.24 per cent.

According to analysts, even hedging positions is not a viable option for FIIs due to the high premiums involved. “FIIs look at hedging in the short-term, like one or two months. But hedging positions for over a period of one-year will significantly add to costs owing to the high premiums,” said Chokkalingam.

Market participants said that the while the rupee depreciation was a cause for concern, the phenomenon was not restricted to India alone. Currencies of all emerging markets have been under pressure owing to the strengthening of the US dollar. The US dollar has been gaining on the back of an improving US economy.

“There has been a general rush among FIIs to withdraw from emerging markets. It is not just the rupee but also other emerging market currencies which had an impact due to this. With withdrawal of QE3 (Quantitative Easing 3), dollars with flow back to US. This trend of FIIs selling debt in India will continue for some more time to come,” said Ajay Manglunia, Senior Vice-President, Edelweiss Securities.

Further, the narrowing spread betwe the US Treasuries and domestic markets is another reason for FIIs to start selling their Indian debt holdings.

“If the US treasury yields are improving, the spread between the US treasuries and domestic markets will not be very attractive for them (FIIs). Having captured the arbitrage they are now moving out. The QE3 may be withdrawn and the US economy is doing well due to which interest rates there will start moving up,” said Ramesh Kumar, Senior Vice President (Debt), Asit C Mehta Investment Interrmediates.

ENDS