Flood of foreign money fails to shore up stocks

Even as FIIs have pumped in $15 billion in 2013, key indices have declined 3%

Indian equities received the highest foreign portfolio inflows in Asia, barring Japan, since January, but that has not prevented the market from underperforming most of its peers in the continent. While foreign institutional investors (FIIs) have pumped in about $15 billion (Rs 86,700 crore) into domestic stocks so far in 2013, the benchmark indices have declined roughly three per cent, making these the third worst performers in Asia.

Brokers said unabated selling by domestic investors, mainly institutions, including mutual funds and insurance companies, has weighed down Indian equities so far this year. "The weak performance of the Indian markets can be largely ascribed to the selling by domestic institutions. These institutions have been selling aggressively this year, which has been the highest in recent times," said Abhay Laijawala, managing director and head of research, Deutsche Equities India.

So far in 2013, domestic institutional investors (DIIs) have net-sold to the tune of Rs 49,000 crore. These investors were sellers worth Rs 57,000 crore even in 2012 but the benchmark indices rose 25 per cent as FII poured in roughly $25 billion.

Sharp redemptions at mutual funds and insurance companies have forced these institutions to dump stocks as retail investors sought to cash out when the markets were closer to their record levels. At the same time, DIIs have been unable to attract fresh money.

"Looking at the market performance, one would expect retail investors to get cautious and look for an exit. We have seen higher mutual fund redemptions at 20,000-21,000 levels than at lower levels. Investors have either been booking marginal profits or simply pulling out the capital invested at these levels," said S Krishna Kumar, head-equity, Sundaram Mutual.

Tightening of insurance product norms forced insurance companies to sell.

State-run Life Insurance Corp of India, the country's largest insurer, has, this year alone, booked profits worth Rs 20,000-21,000 crore, said an official from the company.

Brokers who attend roadshows to sell Indian stocks to foreign investors said the lack of appetite for stocks among domestic investors had been a cause of concern for some overseas fund managers. The managing director of a large US investment bank said foreign investors were anxious as to why domestic investors, who are perceived to have a better sense of the ground reality, were bearish about the stock market's prospects.

"Overseas investors are bound to raise concerns about the unabated selling by domestic investors because the market has hardly moved despite huge inflows," said U R Bhat, managing director, Dalton Capital Advisors. "There is clearly a sense of fatigue in the market with the government running out of options to talk up the market and also because of the rush of paper supply (including divestments)."

In the coming months, brokers will have a tough time selling the India story, Bhat added.