No 2008 action replay for FIIs

Foreign funds investing in India are in the exit mode again. So far this month, FIIs have taken out over $2.1 billion from the stock market, the highest monthly outflow in 18 months. While this outflow is attributed to the troubles in Europe, the spate of FII selling is also bringing back memories of similar outflow in 2008, on the back of the sub-prime crisis, Lehman Brothers crash and their effects on the global economy.

Market analysts feel that foreign fund managers are playing it safe — a rush towards risk aversion in market parlance — and taking money off the table from the emerging markets to keep cash in hand. “Global investors have witnessed two crises in the last three years. So naturally they tend to be more cautious,’’ said Jamal Mecklai, CEO, Mecklai Financial Services.

This time around, however, there is a silver lining to the outflow . Most market players assure that the Indian economy is in much better shape now than it was when the sub-prime crisis struck the global economy. So chances are that FII outflows could reverse the trend over the next 3-6 months, compared to about 18 months that foreign fund managers took after the subprime jolt, to come back to the Indian market in a big way. Sebi data showed that between October 2007 and March 2009, FIIs had taken out nearly $7 billion from the Indian market. And the BSE sensex, after rallying to its historic high of 21K in January 2008, had crashed to 7,700 within 10 months.

“Unlike the impact from the Lehman bust, this time round, the broader macro setting for India and the pressure points are significantly different from what they were in 2008,’’ said a note by Rajiv Malik of Macquarie Securities. He pointed out that during the Lehman bust, the investment cycle and foreign borrowings of Indian companies were at or near their peaks, and India had witnessed record capital inflows around the same time. “This time, the capex upturn is yet to take off and overseas borrowing by Indian corporates has not been unnerving. Further, policy flexibility still exists,’’ Malik said.

Economists are also looking at the Q4 GDP numbers, set to be out on Monday. A report from domestic broking major Religare estimated that the Indian economy could post a 9.3% growth in the January-March quarter, taking the annual growth for 2009-10 to 7.5%. Institutional dealers feel that such robust growth numbers, along with the moderation of inflation numbers and lowering of fiscal deficit because of higher-then-estimated inflows from 3G auction, should put the Indian economy on a better footing and attract more long-term FIIs to India.

From here, brokers said, other than global factor, only a bad monsoon could stop foreign funds from returning to D-Street . So far the forecast for monsoon has been good, but last year, at the start of monsoon, a HSBC economist was quoted: “Although weather experts are predicting some catch-up in (monsoon) the next few weeks, we all know that economists are not the only people in the forecast business to be wrong on occasion!’’

courtsey:http://timesofindia.indiatimes.com