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Published on 14/06/2018 2:54:35 PM | Source: Morningstar Investment Adviser India Pvt Ltd

There has been significant outflow from India Focussed Offshore Funds and ETFs - Morningstar Investment

1. Summary of FII flow into the Indian equity markets so far. Comparison of the first six months of the current year viz a viz same period last year.

It has been a bumpy ride as far as FII flows for this year are concerned. The fluctuations in net flows at times have been massive thus making the entire proposition unpredictable. While in Jan, FII bought net assets worth USD 2 billion, in Feb they were net sellers to the tune of USD 1.8 billion. Again, in March, they bought net assets worth USD 1.8 billion where as in April and May they sold net assets worth USD 2.3 billion. In May alone they sold net assets worth USD 1.5 billion the second highest net outflow this year so far.

The flows for this year in the first six months is negligible compared to the flows last year during the same period. While last year FIIs invested net assets worth USD 8 billion in the in the first six months of the year, this year the figure is a meagre USD 15 million (or USD 0.01 billion) until June 12, 2018. So, this year has been extremely unfavorable from FII flow perspective.

2. Views on the DII Flow

At a time when FIIs have been on a selling spree, DIIs continue to invest into the Indian equity markets and stabilizing it. This year so far, DIIs have bought net assets worth USD 7.9 billion. This is much higher than the net inflow of USD 3.3 billion they made in first six months of last year.

The difference between FII and DII investment is that, for FIIs, India is like any other investment destination. They continually evaluate India with other countries to understand the risk reward profile it offers at a given time. Hence, they will not shy away from shifting to other investment destinations if that offers better prospects. As for DIIs, India is the only investment destination.

3. Views on the FII flow

There has been significant outflow from India Focussed Offshore Funds and ETFs. Except for the month of January when the category received a net inflow of USD 1.2 billion, in the remaining four months until May, the category witnessed a net outflow of almost USD 2 billion.

What’s more concerning is that, India focused offshore funds which are long term in nature have been witnessing huge outflows. Over the last four months the category has witnessed net outflow of USD 966 million. On the other hand, during the same period India focused ETFs witnessed a net outflow of USD 940 million. The moving out of long term money from the country is definitely a concerning factor but not unexpected. There could be couple of factors leading to this. Few investors who have been invested in the Indian markets over the last 3-5 years or even more might have chosen to book profit at this juncture anticipating higher volatility in the Indian markets the closer it is to general elections. Additionally, the currency may also depreciate further if US Fed goes ahead and hike rates further. Hence, investors would have chosen to book profit now than riding the expected volatility going ahead.

Besides this there are other factors as well which led to the outflow from FIIs in the month of April and May. High crude prices, depreciating rupee, higher bond yields in the US were the primary reasons for the same.

4. Trend in FII flows in June

FIIs have taken a breather from selling as they have bought net assets worth USD 160 million in the month of June so far. This change could be attributed to easing global crude oil prices and revival in corporate earnings.

Having said that, it would be too early to say that there is a reversal in trend. FII in fact were net sellers yesterday. We need to wait for some more trading sessions to get a better idea. From here I see a relatively stable month of June.

5. Views on the trend going ahead

A lot depend on macroeconomic and geo-political factors both on the domestic as well as global front. Over the last few months, currency movement, oil prices, lack of earning and economic growth in India and various issues on the global front have been dictating FII flows in India. Going ahead we will be entering election season which could add fair bit of volatility in the markets and FIIs will also be focusing on the progress of monsoon which is essential to gauge how inflation could pan out.

What we have observed is that FIIs have been tracking these factors closely and they are making their investment decisions based on news flow on these issues. Given these are moving factors they keep on shifting from positive to negative or vice-versa at regular interval. So, the investments are basically being made on a short-term basis rather than long-term. And I believe this scenario would continue for the next few months.

 

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