Lured by US assets, FIIs abandon India

Lured by US assets, FIIs abandon India

News:

Equity markets saw a net outflow of $4.58 billion after foreign institutional investors abandon Indian market.

Important Facts:

• FII have sold Indian equities worth $4.58 bn so far in 2018, the most since 2008 when they did withdraw $12.92 bn.
• FIIs were net sellers in all major Asian markets, except China. In Asia, they sold the most in Japan.

Reason for sell-off

• External Factors: :
  • US Federal Reserve raised interest rates – Higher interest rates tempt large foreign funds to move their money to the US, hurting emerging markets that faced the double whammy of a stronger dollar and high crude prices. The Fed has indicated two more rate hikes in 2019
  • Rupee Depreciation – Since January, Indian Rupee has depreciated by over 16 per cent to record a new all-time low practically every month. The decreasing value of rupee implies an increased cost for Indian economy to pay for its import obligations, thereby risking an increase in inflation. FIIs are concerned as they have to earn more returns to substitute the fall in their portfolio value due to rupee depreciation.
  • Beneficiary Ownership – SEBI announced a set of new rules for foreign fund ownership last month. Its objective was to stop Indians from round-tripping their money. If implemented, the fund managers of Indian origin, whether residents, NRIs, OCIs, or others, would need to limit their holding in the funds they manage or in the Assets Management Companies managing them.
  • Fear of US sanctions and trade war – The trade war between US and China has escalated on the back of import tariffs imposed by the US President Donald Trump on the Chinese imports and Foreign investors are worried the trade war may spill and negatively affect Indian export potential, and ultimately reduce investor returns.
  • Rising crude oil prices: This year alone crude oil has appreciated by 17.25 per cent. The rise in crude oil implies that logistics cost for all commodities such as food items, agricultural output, expenses on daily transportation would rise thereby increasing inflation. This would impact the profitability of most companies, which would lead to fall in stock prices of such companies, erasing investor wealth.
  • Tumbling Small & Mid-Caps – The S&P BSE Mid-cap index recorded a high of 18,321.37 on January 2018 and since then, the mid-cap index has fallen 23.86 per cent. This plunge in the markets has erased most of the wealth created since March 2017. For foreign investors, mid-caps and small-caps have lost their sheen due to their consistently declining returns.
  • Internal Factors: Such as High Current Account deficit discouraging FIIs to park their money in Indian Market.