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FII flows may remain moderate

The slowdown in FII inflows will lessen the RBI’s burden as it will neutralise their impact on domestic inflation, reports BS Srinivasalu Reddy.
By BS Srinivasalu Reddy | Hindustan Times, Mumbai
UPDATED ON AUG 21, 2007 12:18 AM IST

Despite the US Federal Reserve slashing its discount rate, the rate at which banks can borrow from it, to ease tight liquidity conditions for American banks hit by sub-prime crisis, foreign institutional investor (FII) inflows into India are likely to remain moderate in the next couple of months, according to experts.

But if the sub-prime crisis, stemming from high-risk home loans sold as bonds, is to lead to global recession then the slowdown in FII inflows is set to continue for quite some time. Ultimately Indian markets will remain attractive for them even at that stage due to strong fundamentals, experts said. FIIs from the US and Europe are major investors in the Indian stock markets.

“There is a likelihood of decline in FII inflows into India in the short-term, because of the high margin calls in the US. In the long-term, however, as the central banks are providing some lifelines, the inflows are set to accelerate after a couple of months,” said Narayan Ramachandran, CEO of Morgan Stanley Investment Management India and Managing Director in Morgan Stanley’s Global Emerging Markets Group.

“Yen's (Japanese currency) strengthening also accentuated the problem leaving the heavily leveraged investors vulnerable. This will also impact inflows in the short-term,” Ramachandran added.

The US sub-prime crisis had affected funds availability with the US banks. The bank loans securitised with hedge funds already have lost part of their value forcing them to pullback some of investments from emerging markets like India, to meet margin calls. Margin calls are notices given to investors to bridge gaps arising from declines in the value of securities.

Manish Sonthalia, Vice-President-Equity Strategy of Motilal Oswal Securities, said, “Long-term investors have not moved out in line with the long-term trend we have seen. But short-term money has moved out already. This is part of repricing and resetting of risks that takes place after certain events.”

“However, the market is still divided on the possible action of FIIs, so far. Usually, there is a tendency for the capital to move to safer destinations like developed countries. But robust Asian markets, led by India, are holding out better promise this time,” Sonthalia added. Though FII inflows are a factor of what the FIIs or hedge fund investment trends globally, Asian economies could attract a higher share of funds this time.

The slowdown in FII inflows is expected to lessen the RBI’s burden to that extent as it has to neutralise their impact on domestic inflation. RBI had been trying to control foreign currency inflows by allowing outflow in the form of resident Indian investments abroad.

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