Brazil and Russia may be emerging more attractive than India to foreign investors this year, as the domestic economy is plagued by inflation and high commodity prices, say brokers and analysts.
These emerging markets have the advantage of being commodity producers and are benefiting from rising prices. India, on the other hand, is a net commodity importer.
“The shift of the FIIs is a cause for worry. When commodity prices rise, valuations for countries such as Brazil and Russia look good. Indonesia is also a commodity producer, but investors are worried about governance issues there,” Mr Atul Singh, Managing Director and Head, Global Wealth & Investment Management, India, DSP Merrill Lynch, told
FIIs have pulled out more than $1.2 billion (around Rs 5,800 crore) so far this year, pushing the Sensex below the 18,000 mark in intraday trade on Tuesday. Since January, the benchmark index has fallen 13 per cent from a high of 20,664.
Mr Ashish Gupta, Head of Research at Credit Suisse, said Indian markets have seen “disproportionately high foreign flows” last year ($29 billion). In 2010, “emerging” Asia saw inflows of $64 billion with the most coming into India.
Global investments are likely to also head towards a recovering US market, besides Germany, said Mr Singh. These markets are expected to give 10-15 per cent returns in 2011, while Indian markets are expected to be flat.
“Though higher inflation might be partly priced, we are yet to see significant selling on the part of FIIs. Their selling can take Indian markets down a further 10-15 per cent”, said Mr Suresh A Mahadevan, Analyst at UBS Securities.
Merrill Lynch, however, feels that in the long-term FIIs are likely to head back to India. “The biggest factor is growth expectations. India has fundamental growth, which will be chased by global savings,” said Mr Singh. The brokerage expects FIIs to pump in close to $16 billion this year.
SEBI's new directives to strengthen the reporting process related to offshore derivative instrument and participatory note activity has also discouraged FIIs somewhat. In a circular issued in January, SEBI said that FIIs issuing offshore derivative instruments and participatory notes need to provide trade-wise details of their activities in India by the tenth of every month with a six-month lag (that is, April data by October 10).