FPI Sell-off

August 2015 was the worst month since January 2008

The quantum of FPI selling that we saw in August 2015 was not merely an outflow. It was a virtual deluge. Net FPI selling was almost to the tune of Rs.19,700 crore in the month of August and was the worst month since January 2008. Over 92% of this selling happened in equities and only 8% in debt. The start has been quite bad in September with outflows to the tune of Rs.2,700 crore in the first 3 trading days. The question, is what could have spurred such a massive sell-off and what does it hold for the future of the market recovery?

Concerns on INR…

That is the biggest worry for foreign investors. As China goes about devaluing the Yuan, the pressure is building up on the rupee. A weak rupee is never great news for FPIs and they would prefer to exit the markets and re-enter once the currency volatility subsides. We saw that in 2008, in 2013 and again in 2015.

Unwind of carry trades…

That was another major factor for FPI selling. Most FPIs had borrowed in cheaper currencies like the Euro and the Yen and allocated the funds to emerging markets like India. The going was great as long as the Euro remained weak and emerging market currencies remained strong. With the devaluation of the Chinese Yuan, the entire equation changed; leading to the sell-off in Indian markets.

Very few beneficiaries…

A weak currency normally helps emerging markets with a large export basket. But the Indian economy, which runs an annual trade deficit of over $120 billion, will hardly benefit from a weak currency. There may be a handful of sectors like Pharma and IT where the benefits of a cheap currency could be visible. But most of the other sectors like metals, capital goods, banks, oil refiners etc would suffer due to a weak rupee. That is already visible in the prices of these stocks.

Show me the growth…

With the Moody’s GDP downgrade, even the India growth story has come into question. If India ends up with around 6.5% growth, then we may be only marginally better than previous year; adjusted for the change in methodology. That is not encouraging news. The alpha money is surely looking at an opportunity to exit India.

Unlike 2008, Indian markets have not fallen vertically. Thanks to DFIs! During August as FPIs sold Rs.19,700 crore, DFIs were net buyers to the tune of Rs.16,500 crore. Year to date, FIIs have withdrawn $1 billion while DFIs have pumped in $7 billion. That has been a major saving grace for markets. ©

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline

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