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Home > Media > Equity wary FIIs to withhold investments

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Equity wary FIIs to withhold investments
Institutional Investor
10th September 2008

Despite the rupee’s fall below Rs 45 a dollar, foreign institutional investors (FIIs) are in no hurry to pump in fresh money into the Indian stock market. They are still risk-averse to equity.

With the rupee slipping to its lowest since November 2006, expectations are high that FIIs will again invest in the Indian market as prices are attractive.

This may not happen and, says Vikas Khemani, executive vice-president at Edel- weiss Capital, the currency parity is not the only deterrent.Khemani also sees a global factor. “Globally, there is a risk aversion to equities. The currency level is not the only factor FIIs look at.”

He says that for FIIs the Indian market is still not in attractive in terms of valuation. Hence, they may continue to wait. Moreover, global equity markets are in a state of flux and an end to the sub-prime crisis is still not in sight. A counter-argument is that FIIs will find the Indian market cheaper at Rs 45 a dollar.

Besides, Sensex is nearly 30 per cent below its January peak. However, since the rupee is fast depreciating, this argument does not hold. For existing investments too, a depreciating rupee means lower returns in dollar terms.

Paul Parambi, head of institutional business at Kotak Mahindra Bank, points out: “When the rupee depreciates at a fast pace, FIIs tend to wait. If the rupee depreciates further, their cost of buying will go up.”
According to provisional data, FIIs sold Rs 1037.3 crore worth of stocks in the cash market on Wednesday; on the preceding day, they sold Rs 1,857 crore worth of shares. The rupee fell below Rs 45 a dollar on concerns that equity sales by global funds and India’s widening current-account deficit would result in capital outflows. Another reason for the slide is the strengthening of the dollar globally. The US currency advanced against all of the 16 most active currencies in the past three months. The rupee has been the third worst performer among the 10 most active Asian currencies (except the Japanese yen) this year, with a 12.6 per cent decline.
FIIs sold a net $7.3 billion worth of shares this year, according to the Securities and Exchange Board of India (Sebi). India's current account deficit, a measure of trade and investment flows, widened to $17.4 billion in year ended March 31, from $9.8 billion in the previous year. India’s balance of payments fell to $36.6 billion from $92.2 in the same period.

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