Funds withdraw Rs 39.4 k cr amid US Fed rate hike fears
Most diversified global funds, that put money in various markets in Asia-Pacific, have allocations of about 3% of their total investible funds for India.Updated: Dec 05, 2016 11:22 IST
India-focused funds and global diversified funds that had invested heavily in India’s equity markets till September, have turned net sellers since October on the increased possibility of an interest rate hike by the US Federal Reserve which would make the US yield better returns compared to emerging markets like India.
Also, with India yet to come to terms with the impact of the demonetization exercise – some research estimates have said that about 0.5% of GDP growth might be shaved off due to drop in consumption – investors are uncertain about continuing with their exposures to India.
Most diversified global funds, that put money in various markets in Asia-Pacific, have allocations of about 3% of their total investible funds for India. This will come down once US raises rates in December.
Foreign investors sold Rs 4,306 crore in October and further withdrew Rs 18,244 crore in equities in November, according to regulatory data. In comparison, emerging-markets funds and Asia-Pacific funds pumped in an estimated $4.0 billion and $1.1 billion, respectively, into Indian shares, over the July-September quarter. Since November, such foreign funds totally invested about $10.16 billion here, according to Morningstar.
In the same period through October, domestic mutual funds invested Rs 28,517 crore in equities as retail investors sought the buying opportunity that came from the fall in broader market on concerns of a slowdown.
“I would say that the trend is more a reflection that foreign investors are looking for safer havens like the dollar, than from the demonetization,” said Himanshu Srivastava, senior analyst with Morningstar.
The funds in this report include Nomura India Equity, IShares MSCI India, First State Indian Subcontinent II, Jupiter India, Aberdeen Global Indian Equity Fund, SMAM High Growth India Mid-Cap Equity,
The FII pullout has already roiled stock markets with the BSE Sensex tumbling close to 6% since the end of September.
The outflows will also have an impact on foreign exchange reserves and strengthen the dollar further. India’s rupee hit a 39-month-low end of November of around 68.80. On Friday, the rupee closed at 68.20 to the dollar. For the week ended November 25, India’s foreign exchange reserves declined near $194 million to $365.306 billion.
“While India’s balance of payments situation has improved sharply since the taper tantrum in May 2013 (when India saw significant currency volatility on foreign outflows), it will not remain immune to the outflow pressure seen across emerging markets. In the run up to the end of the calendar year, we expect the flow environment to stay highly challenging with many uncertainties,” said Abhay Laijawala, managing director and head of research at Deutsche Equities India.
The US Federal Reserve meets mid-December to chart its course of action and many expect it to raise interest rates, following a strong US jobs data. The US unemployment rate hit a nine-year low, with the economy adding 178,000 new jobs in November.