India trumps rest of Asia in FII inflows

Arvind Jayaram
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Indian equities are seen as a better bet for parking foreign funds than their peers in emerging Asia.

Foreign institutional investors have pumped $10 billion into Indian stocks so far in 2012. This translates into a 336 per cent rise in net FII investment compared with the first seven months of 2011.

According to Bloomberg, Indian equities top the table of net FII inflows in Asian emerging markets in 2012. South Korea is the other country in the group that has received substantial inflows of $4.9 billion. This is an increase of 1,200.9 per cent over the same period last year.

Net FII flows into the Philippines also shot up by 267.7 per cent to $2.1 billion, while net FII investment in Thailand rose by 161.8 per cent to almost $2 billion.

Indonesia, on the other hand, witnessed an 82.1 per cent dip in net FII investment to $498.2 million during the period under review. Taiwan also saw net outflows of $2.8 billion, but this was still a 92.8 per cent improvement compared with the previous year, when the FIIs pulled out even more money.

India’s neighbours Pakistan saw net outflows of $2.1 million, while Sri Lanka saw net FII investment of $189 million in the January-July 27 period of 2012. While policymakers in Pakistan will no doubt be concerned by the 123.1 per cent dip in foreign institutional investment, Sri Lanka will be enthused by the over four-fold rise in net foreign flows.

The foreign inflows were not evenly spaced through the year. India saw net FII inflows of $2 billion into the equity market in January. This was buttressed by another $5.1 billion in February and $1.7 billion in March, taking the cumulative inflows close to the $10-billion threshold.

But the country witnessed net outflows of $205.5 million in April and $58 million in May, besides another $86.2 million in June. But the net inflow of $1.5 billion in July helped the net FII flows surpass the psychological $10-billion mark.

Impact on market

It appears that domestic investors and FIIs do not always see eye-to-eye on market potential. The BSE Sensex rose by 11.2 per cent in January, but despite higher FII inflows in the subsequent month, it rose by just 2.6 per cent.

In March, the Sensex shed two per cent even as FIIs pumped in more money. But when FIIs reduced their exposure to the market in June, domestic investors pushed the Sensex up by 7.5 per cent. The Sensex is down 3.2 per cent so far in July despite robust net FII inflows.

The impact of FII flows on the rupee’s fortunes is also subject to debate.

In January, the rupee gained 6.8 per cent against the dollar, but in February, it lost 0.8 per cent despite higher inflows. In March, the rupee slid further by 3.8 per cent. It fell by 3.7 per cent and then 6.4 per cent over the next two months, but gained 0.9 per cent in June despite net FII outflows.

In July, the rupee has gained 0.5 per cent against the dollar.


(This article was published in the Business Line print edition dated July 30, 2012)
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