 "Global emerging market funds reduce India exposure")
The exposure to Indian equities by global emerging market (GEM) funds declined to 12.2 per cent in March this year, down from 12.8 per cent earlier in January, as per a report by Kotak Institutional Equities. The report said that the reduction in exposure was due to a decline in the currency. The total flows into India from global funds investing in emerging markets, by both exchange-traded funds (ETFs) and non-ETFs, have been over $5 billion.
"Allocations to India by Asia-ex Japan funds and GEM funds has come off peaks. Exposure to India by Asia ex-Japan funds fell by 0.8% month-on-month (to 12.9% in March). Rupee depreciation may have also impacted dollar-denominated allocations," said the report titled India Quantitative - Foreign Fund Tracker authored by analyst Saifullah Rais.
The INR since January has depreciated by about one per cent against the US dollar.
Market participants also said that the over-weight positions on India held by most of these funds was another reason for the reduction in the exposure.
"For the last 6-9 months, these funds have been maintaining an overweight position on India. So we are seeing some profit-taking by these funds. Also, globally there is a risk-off behaviour which is why flows into the emerging market regions and to India, in particular, have been slowing," said Rajesh Cheruvu, chief investment officer, RBS Private Banking, India.
India has been among the worst performers in emerging markets, having declined by about 8 per cent from its peak.
"This is also a reflection of the lack of progress in reforms in the last one-year period. People are a bit worried because of the speed at which the turnaround has happened has been disappointing," said U R Bhat, managing director, Dalton Capital.
ALSO READ: It's time to rethink emerging markets
Analysts said that recent events such as the government's stance on imposing minimum alternate tax (MAT) on foreign portfolio investors, rising commodity prices, the slow recovery in the economy had made investors nervous. This was further aggravated by the slowing down of the Chinese economy and the improvement in the US and European markets.
As per the report a large proportion of flows are coming in from exchange-traded funds. In the last month alone, about $1 billion of flows have come into India, of which about $897 million has come in through the ETF route.
"Active funds are substantially overweight India considering the average GEM-focused ETF allocations to India amounted to 7-8%," said the Kotak report dated May 11, 2015.
Experts said that going forward, flows into India could see some pressure as data from the US and Europe continues to show improvement. Besides, re-allocation to other better performing markets in the EM region could continue in the absence of any market-moving triggers.
"But we could see some change in sentiment if the RBI decides to cut-down interest rates in the June policy review. Also, we can see the first signs of economic turnaround and some improvement in corporate earnings which could be good for the markets," said Bhat.