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Unabated redemption pressures continue to dog foreign funds investing in Indian equities. While most of the outflows were largely restricted to India-focused offshore funds till recently, the contagion is spreading to emerging market Asia (excluding Japan) funds, among the largest investors in domestic equities in the past couple of years. The weakness in the emerging market currencies such as the rupee against the dollar in the wake of concerns over the US Fed’s remarks of rolling back its stimulus package has been a trigger for these outflows, said analysts.
In June alone, the emerging market exchange-traded funds (ETFs) have seen net outflows to the tune of $6 billion, according to data from Morningstar. Analysts said the average allocation to India in these funds stands at around 10-15 per cent. This translates to net outflows to the tune of $600-900 million from India.
Morningstar categorises foreign funds investing in India into India-focused offshore funds, emerging market funds and Asia (ex Japan) funds.
Analysts said the outflows from emerging market funds show a general risk-aversion to the region because of the depreciating currency. “The sharp depreciation in the rupee over the past two months could have prompted these outflows. Global risk aversion, due to the Fed tapering its quantitative easing could have also contributed to these outflows in past couple of months,” said Dhruva Raj Chatterji, senior investment consultant India at Morningstar Investment Management. Since June 11, the rupee has depreciated by 10 per cent, causing jitters among foreign investors.
In June, foreign institutional investors (FIIs) have pulled out $1.7 billion from Indian stocks, according to Sebi data. However, in 2013 so far, FIIs have purchased to the tune of $13.3 billion. Brokers said redemptions from emerging market funds are still insignificant compared to the money invested in the markets. This is partly because many foreign investors, who had invested in these funds when the rupee was stronger, could be reluctant to redeem immediately as the fall in the Indian currency has resulted in them sitting on losses.
“There is no new money flow coming into these funds and they are witnessing heavy outflows. But though flows have slowed, India still enjoys a favourable position among all emerging economies,” said Gopal Agrawal, chief investment officer and head of equity at Mirae Asset Global Investments India.
However, investors in India-focused offshore funds have been less forgiving they have pulled out about $2.5 billion from these products so far in 2013. In calendar year 2012, India-focused funds saw net outflows.
“Investors have been pulling out of these funds due to the underperformance of the Indian equity markets and overall global risk-aversion. However, the allocation (to India) has dropped largely due to the decline in the market valuations than due to any fund manager activity,” said Chatterji.
With the US economy showing signs of recovery and the US Fed subsequently announcing the withdrawal of the third round of the bond buying programme, known as quantitative easing (QE)3, investors find the developed markets more attractive at this point.
Going forward, foreign flows into India would continue to depend on the rupee movement and the risk appetite among investors. “The re-allocation into India will depend on whether the investment cycle in India will restart again,” said Vijai Mantri, managing director and chief investment officer of Pramerica Asset Managers. “The currency reflects the inherent strength in the economy. From that perspective, we will have to fight harder for new allocations,” he said.
