Local FIs pull the Sensex plug

Fears about the future triggered last week's fall in index

The figures do not show any major dip in foreign institutional inflows yet. Domestic mutual funds have also been buying stocks steadily. And yet, the benchmark Bombay Stock Exchange Sensex crashed 6.84 per cent in just two weeks after hitting a lifetime high of 6,915 points on March 8. Whodunnit?

Explanations vary, but one needs to be wary of the post-facto rationalisations of fickle market movements. Perhaps the best explanation for the crash is the obvious one "" domestic operators and investors have tried to time their market exit. By getting out before the crash, they may have triggered the crash.

That, however, is not the way anyone is telling the story. Says Deepak Chhabria, COO (institutional equity) at IL&FS Investsmart: "The market has fallen on liquidity concerns, both overseas and domestic. Financial year-end pressures and (expectations of) a possible slowdown of foreign funds in emerging markets on account of higher US interest rates have also led to the weakness."

Says Falguni Nayar, co-head of institutional equity at Kotak Securities: "The recent fall is as much an emerging-market phenomenon as it is domestic. Global issues like higher oil prices and US interest rate hikes have led to some concerns. A correction was necessary to factor in these risks after the recent surge."

Reading between the lines, what the experts seem to be saying is that investors "" market operators and others "" have been trying to second-guess market movements based on external factors.

With brokers asking investors to close out leveraged positions ahead of the financial year-end, the wise thing for everyone to do may have been to book profits and exit before the storm breaks.

The BSE Sensex rose by 3.53 per cent between January 3 and March 8, when it hit its all-time high. But, subsequently, it fell by 6.84 per cent to 6,442.87. The BSE Sensex has fallen by 3.54 per cent year to date (from January 3).

Brokers add that the market is usually volatile ahead of the expiry of the month's derivatives contracts. The expiry date this time falls coincidentally on March 31. Arbitrageurs are also unwinding positions because of financial year-end pressures.

That liquidity concerns were more apparent than real is clear from the market inflow figures. Foreign institutional investors (FIIs) made net equity investments of Rs 12,187 crore in the 45 trading sessions between January 3 and March 8, bringing their average daily net purchases to Rs 271 crore. During this period, domestic mutual funds made net purchases worth Rs 1,010.89 crore at a daily average rate of Rs 22.46 crore.

The FIIs subsequently put in another Rs 4,952.02 crore in 11 trading sessions at a daily average of Rs 228 crore between March 9 and March 23 (excluding the Bharti Tele-Ventures off-market deal worth Rs 2,441 crore), while domestic funds made net purchases worth Rs 671.19 crore at a daily average rate of Rs 61 crore, according to data put out by the Securities and Exchange Board of India. Market sources said FIIs were net sellers on March 24, but the overall picture did not suggest any eagerness to pull out of India.

On the other hand, not all inflows went directly into the secondary markets. The January-March period saw a resurgence in fresh equity offerings, with Jet Airways being the big one, and Punjab National Bank finishing its Rs 3,000 crore issue just two weeks ago. By the end of March, the value of IPOs will cross Rs 5,000 crore.

With domestic and FII inflows bringing in over Rs 17,000 crore in January-March and IPOs absorbing (or set to absorb) only Rs 5,000 crore, it is obvious that it is not lack of liquidity but fears about the future that has triggered the recent fall.

Says the research head of a local brokerage house: "FII inflows have been negative or slowing down in most emerging markets in the last 10 days. The premium between ADR prices and domestic underlying shares, as also the premiums in futures and options, have come down, reflecting the nervousness at current index levels."

In some cases, domestic operators have reported persistent selling, with stop-losses being triggered in some cases.

Brokerages have also pushed clients to square up. Notices have been issued requesting clients to settle accounts for the financial year ending March 31.

On March 8, when the Sensex reached tantalisingly close to 7,000 points, investors held on in the hope that they would book their profits after that. What seems to have happened is that the smarter ones did not wait for the Sensex to cross 7,000 before pulling the plug.