Panic selling by foreign funds in equity markets is at record levels. In August, so far, foreign institutional investors (FIIs) withdrew a whooping Rs 8,350 crore or close to $1.9 billion from stocks. This has resulted in August being the worst month for derivative expiry, since October 2008, when top global investment bank firm Lehman Brothers filed for bankruptcy.
Then, FIIs sold stocks worth Rs 14,200 crore, as fall of Lehman triggered a global freeze in bank lending.
In the August equity derivative series, the Bank Nifty index fell the most, by 16 per cent. The fall in global bank shares was triggered by rumours of Bank of America's rising default risks, after its stock fell nearly 50 per cent from annual highs in recent weeks.
Key benchmark index BSE Sensex has lost 21 per cent this year and is the worst performer in the world after Brazil’s Bovespa Index among benchmark gauges in the the world’s 10 biggest markets. The broader S&P CNX Nifty index of the National Stock Exchange was down 12 per cent in the August expiry. In the October 2008 series, Nifty had fallen around 34 per cent.
Among stocks, Reliance Capital, Reliance Power, Sesa Goa, Tata Motors, HCL Tech and JSPL fell 25-30 per cent in August. Market players are of the view that 80 per cent of the current selling is seen from top index and hedge funds, who are winding up to pay back to the banks.
“This unprecedented selling has come from hedge funds and ETFs. US banks are calling back their loans as the US regulator is tightning norms for hedge funds, which has triggered panic. Winding up of hedge fund by George Soros says it all,” said Deven Choksey, managing director of Mumbai-based K R Choksey Shares and Securities.
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Top hedge fund manager George Soros of Quantum Group, shut his business after running it for over a decade as new disclosure norms set by the Securities and Exchange Commission, did not suit his operations.
Usually, hedge funds and index funds are known to borrow 20 per cent from clients and rest 80 per cent is financed by banks, mainly from the US. According to Bloomberg, the US Federal Reserve had lend over $1.2 trillion to banks including Morgan Stanley, Goldman Sachs, Bank of America Merill Lynch and Citi group among others since October 2008. This money was then lend to hedge funds and index funds, which are under no regulatory obligations to disclose their portfolio or borrowings, in any country. Hedge funds and index funds operate in India as FIIs, while the above mentioned banks are also present with either their investment banking or brokerage arm.
Earlier such FII selling was witnessed on only four occasions in market history, including October 2008. In January 2008, FIIs sold stocks worth Rs 17,200 crore as the key benchmark equity index, Sensex of BSE, stood at a life time high of 21,000. Then, the sub-prime crises was seen spreading in Asia and disappointing listing of country’s largest public offer of Reliance Power had dampened sentiments.
FIIs were back with a vengeance again in June 2008. Then, they sold stocks over Rs 10,000 crore in a single month, as money was moving towards crude oil and dollar speculation. The global crude price had crossed the $100-a-barrel mark for the first time and bets were that it would soon reach $150. The global dollar index, USDX, a focal point to derive dollar value traded on the Intercontinental Exchange platform in the US, too, presented speculation opportunity, as it was near its lifetime low all major currencies. The selling of Rs 9,000 crore by FIIs was seen in May 2010, when the European debt crises raised its head for the first time after talks of a Greek default.