FII Inflows

When will they return to India?

FII selling has been the big story since August. After selling nearly Rs.50,000 crore worth of equities in the last 7 months of 2015, the New Year has begun on a discouraging note. In the month of January 2016, FIIs have sold equities worth over $2 billion in the first 16 days of trading. What is more, they have been heavy sellers on 15 out of these 16 days, which clearly shows which way the FIIs are trending. During the same period, the DFIS have been buyers to the tune of nearly $2 billion but their impact has been limited due to the absence of currency effect in case of the domestic institutions. What is the outlook for FIIs in 2016?

Risk-off will be a theme…

 Let us face it; risk-off will continue to be the theme for 2016. With China slowing down and the US on a rate hike path, risk-off seems to be here to stay. It is not only favoring developed markets over emerging markets but it is also favoring debt and safe-haven assets over equities. That theme will ensure that FIIs will continue to be net sellers in emerging markets like India on every bounce.

Oil will be the overhang…

We got to worry about falling oil prices. With oversupply and stockpiling, any bounce will be temporary till the supply-demand equation is rectified. As long as oil is week, the SWFs will be aggressive sellers  and that means ETFs and the P-Note originators will be sellers on equities that have held value. India could see outflows on that count. That risk remains as long as oil prices remain weak around the $30/bbl mark.

Quarterly results will be the key…

The third quarter ended December could be key in determining whether green-shoots of recovery are visible or not. Early indications seem to be positive but the stressed sectors like steel, oil and banking will be the key and they are likely to disappoint. Negative cues from the quarter will mean that FIIs will continue to be sellers on fundamental cues.

Currency could be the savior…

Currency could actually be the good news as far as FII flows are concerned. Back in 2013, the problems arose from debt redemptions and an erratic fall in the rupee. This time around the rupee has been a lot more calibrated. Also the rates have been kept attractive enough to encourage FIIs to hold on to Indian debt. Also the RBI’s track record with the rupee will give a lot of confidence to the FIIs on the currency front. Typically, FIIs prefer to buy once they believe that the currency has bottomed out. If oil bottoms out and Q3 is encouraging, the stable rupee will ensure that FIIs could be back in Indian equities with a vengeance. That will be good news! ©

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