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November 20 2019
FIIs get edgy on India investment
17 June 2011

 Weighed down by worsening macro-economic factors, combined with the governance deficit at the centre, foreign investors are increasingly wary of giving India the premium slot among emerging markets investment destinations, something that the country used to enjoy even six months ago. While FIIs have, for the first time in nine quarters, reduced their total stake in top Indian companies, a survey among foreign fund managers shows that they are underweight on India. However, the silver lining is that even if one of the two-finance and politics-shows some signs of stabilizing, foreign flows would again pour into India, people in the institutional dealing side of the market said. 

Over the last few months, India has witnessed a series of arrests of high-profile people, including former ministers and MPs, for their alleged involvement in a number of scams. This has taken a heavy toll on the Congress-led UPA government with even its own ministers admitting governance deficit, and there is a near-total policy freeze. On the macro economic front, for months the rate of inflation has been hovering around the double-digit mark, and to contain that RBI has raised key policy rates ten times since March 2010. Since then the growth rate, which was 9.4% in March 2009, dropped to 7.8% by March 2011. 

A recent survey among global fund managers, carried out by Bank of America-Merrill Lynch, showed that India is among the least favoured investment destinations, with a underweight scale at -20%, the lowest reading in the last six months. The same survey also noted that among the Asia-Pacific investors, India has a -13% preference, better than Australia (-17%), the same as Indonesia(-13%) but worse than Korea (-8%). 

FII shareholding patterns, one of the indicators of foreign fund managers' interest for Indian stocks, too point to a declining trend. A recent analysis of the end-of-the quarter shareholding patterns for BSE 500 companies, by domestic brokerage ICICI Securities, indicated a slow decline in FII interest in Indian companies. Over eight successive periods, between March 2009 till December 2010, FII holding in these top 500 companies had increased at the end of every quarter, from 9.1% to a high of 13.1%. However, the corresponding data for the quarter-ended March 2011 shows a dip to 12.6%, the analysis showed. And so far this year, FIIs data on the bourses show a net outflow of Rs 13,253 crore (nearly $3 billion), of which about Rs 5,300 crore was in the last one and half months. 

Interactions between top company officials and their shareholders too are giving similar signals. Some top company officials TOI spoke to agreed foreign fund managers are worried about the way Indian leadership is steering the economy and taking decisions on the policy front. "FIIs are keen to see progress on various economic policy matters especially related to infrastructure development like land and other clearances at a faster pace," said Gagan Banga, CEO, Indiabulls Financial Services. "The fear among fund managers is that India may lose its premium over other emerging markets if the government does not make substantial progress in infrastructure development and also in controlling scandals. If India does not move into the category of well governed countries, FIIs may lose interest further," Banga said. 

Another top company executive, who runs one of the sensex 30 companies, said during his recent visits to investors in the US and Europe, foreign investors expressed their concerns about lack of governance, corruption, inflation, interest rate and investments in infrastructure. "There is fear about lack of governance and also in delay in taking forward the economic liberalization process," the official said. "A number of important bills are pending before Parliament, and several important decisions are to be taken. Opening up of the retail sector, companies bill, increasing the FDI limit in the insurance sector are just some of these," the official said. However, not everything is lost and a section of institutional brokers believe the phenomenon is just a temporary one because it's one of those rare occasions when the deficits on the political and economic fronts coincided. 

Political risks are always there in most emerging countries, including all BRICS countries, they believe. But India being a democratic country, though hugely chaotic and dysfunctional, political risks are much lower when compared to China, Brazil and Russia. Combined with lower political risks, "the long term structural factors like economic growth, demographics and consumption, are very much intact," said Vikash Khemani, president & institutional equities, Edelweiss Securities. So the thawing of FII inflows here is more of a temporary phenomenon, rather than a long-term structural concern. 

"India has mostly grown despite the government, and not because of the government. So I am confident we can repeat the same thing this time too," Khemani added. 

 

 

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