Europe has been eloquent in its argument that the debt crisis on the Euro zone is nowhere near the sub-prime crisis of 2008, but apparently foreign institutional investors (FIIs) in India are not convinced.
FIIs are repeating their withdrawal strategy of September and October 2008, which has led to a steep fall in the Bombay Stock Exchange’s benchmark Sensex and weakening of the rupee.
FIIs have pulled out a total of Rs 8,488 crore from the Indian equity market in May — the highest in 18 months since October 2008, when they withdrew Rs 15,347 crore after Lehmann Brothers crashed.
This has led to an 8.75 per cent fall in the Sensex in May — the biggest in a month since November 2008.
As of now investors are moving to safer territories. “There is a flight to safety into the US sovereign bonds and that is expected to continue till the FIIs ascertain for themselves that there are no more negative surprises coming from Europe to start investing into emerging markets,” said Dilip Kadambi, managing director, RBS Investment Banking.
“As of now investors are cautious on taking country risk and most of the outflows are redemption related,” said CJ George, managing director, Geojit BNP Paribas Financial Services.
At a time when the FII’s were pumping in money, both the stock markets and the rupee were appreciating but now both have weakened.
The Sensex has lost over 1,500 points or 8.7 per cent in May. The rupee has depreciated by 7 per cent against the dollar (Rs 44.5 in the beginning of May, to 47.7 on Tuesday).
Experts feel the FIIs will return when Europe stabilises. “Given the fact that India remains one of the most attractive destinations, I think that whatever is going out now will come back,” said George.