Tracking FII flows

Lack of alternative investment avenues, given the slowdown in emerging economies, could have made FIIs retain cash in India.

FII inflows of $7.5 billion this year have surprised investors and sent stock prices soaring. Does the reversal in flows mean that global investors are once more moving funds into India?

The sudden reversal in stock prices in January would not have given foreign investors sufficient time to react and bring in fresh funds.

Inflows in India focused exchange traded funds listed on global stock exchanges also shows that foreign investors have not reversed their cautious stance towards India. It is more probable that funds already brought into India by FIIs in earlier years are now ploughed into Indian stocks.

IIP Report

A look at RBI's International Investment Position report gives a better perspective on the foreign portfolio flows. This report captures inflows and outflows unlike exchange data that account for FII purchases and sales only when these investors buy or sell stocks.

It may be recalled that there was a flood of foreign portfolio flows in the second half of 2010 as foreign investors scrambled for Coal India shares.

FII oversubscription in Coal India offer that opened in October 2010 was $26 billion.

This accounted for a chunk of the total inflow of $54 billion that year. Since stocks began correcting in November 2010, foreign investors were unable to invest the oversubscribed portion into other stocks. SEBI data also reveal that secondary market purchases by FIIs began tapering off in the last quarter of 2010.

What was more surprising was the fact that FIIs did not take this money out of the country in 2011. They brought in $5.3 billion in the first three quarters of 2011.

What this data implies is that the large un-invested FII funds towards the end of 2010, continued within the country.

Lack of alternative investment avenues, given the turbulence in Europe and deceleration in economic activity in emerging markets could have made FIIs retain cash in India. Sharp depreciation in rupee in the second half of last year is the other factor that could have deterred foreign investors from taking funds out.

Policy implication

There is no denying that foreign portfolio flows are needed by our economy.

That these investors preferred to retain funds in India through a difficult year (2011) instead of moving it into short-term trading opportunities elsewhere says a lot about the relative safety and attractiveness of Indian economy and equity.

The government could try not to upset this sentiment by maintaining a conducive trading environment within the country.

Reduction in securities transaction tax, especially in equity derivatives, can give a fillip to these flows. Avoiding policy flip-flops on FIIs is another imperative.

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