Opinion: Are FIIs trapped in the Indian market?

Sharp decline in rupee slows down pace of exit for FIIs

Are the Foreign Institutional Investors (FII) trapped in the Indian equity markets? Owning 43.4% of publicly held shares, they seem to be stuck with no easy exit route. Along with the free float (publicly held shares or non-promoter holding) overall holding by FIIs in the Indian markets is also at an all-time high of 20.5%.

 

Pumping in nearly $124 billion (equivalent to nearly 43% of foreign exchange reserves of India) in the last decade, FIIs managed to withdraw only $1.6 billion out of it in June 2013. In fact, June 2013 was the first time in the year that the FIIs withdrew money from the equity markets. And over half of the $124 billion that has come in the country has made its entry in the last three years. 
 

Since 2010,world markets have been on a ‘high’ thanks to the excess dosage of liquidity being pumped in by central banks across the world. India too received its share of the liquidity both in the equity as well as debt markets. Some of the better known global funds have preferred staying away from the country and leaving it to new ETF (Exchange Traded Funds) players to invest in India. These funds went overboard in investing in select index based stocks, which it believed were the most liquid and had reasonably sound fundamentals.
 

Their buying took these stocks to ridiculous valuations resulting in most of the other investors selling it to them. As a result, FIIs now own 43.4 per cent of non-promoters shares in the market. The market during the last three years has not been able to touch a new high despite the huge amount of inflow, only because most of the other players were selling when  FIIs were buying. Generally, investors participate in a rally along with the FIIs, but post the Lehman crisis there was little leverage and interest in the market.
 

Volume shifted from the cash market to the options market which was the playground for retail and high net worth individuals. June 2013 saw cash trading contributing only 5.94% of the overall volume on the market. 

Markets in June 2013 fell on fears that US might close the liquidity tap.

Markets across the globe came crashing down and paused only when bad set of economic numbers meant that liquidity flow would continue. However, Indian markets failed to recover on account of various domestic issues. Money continued to flow out, both from the equity and debt markets. 
 

While the debt markets saw nearly Rs 31,584 crore leave the shores, equity markets witnessed only Rs 9,318 crore being withdrawn. Outflow from the debt market was nearly six times the average inflow, outflow from the equity markets were in line with the average inflow. Yet the fall in prices on the equity markets was much higher than the appreciation caused by the inflow on the same quantum of funds. The only reason for a higher fall is poor liquidity which resulted in higher ‘impact’ cost on the share prices. Had there been more liquidity in the Indian markets, more money could have easily moved out. 
 

Taking out huge amount of money needs a good bullish market. A weak market will only push prices lower,making an exit all the more difficult. FIIs seem to have realised that they are trapped in the Indian equity market. Thus, despite world markets and Indian market recovering to a certain extent in the last fortnight, FIIs are regular sellers, selling whenever they can. The impact of this is seen in the rupee which keeps on depreciating with every sale, only adding to their loses. A short term trade for the FIIs has now become a long term investment.