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Why foreign funds are selling now

Crippled in their home country — the United States - FIIs continue to push the panic button in emerging mkts, reports Arun Kumar.

business Updated: Jan 22, 2008 21:33 IST
Arun Kumar

Crippled in their home country—the United States--foreign institutional investors (FIIs) continue to push the panic button in emerging markets. The result: global fund managers are selling in one of the most profitable markets – India-- to reduce losses caused by the sub-prime mortgage crisis, which is now spreading to bond insurance companies in the US.

Salomon Smith Barney, Merrill Lynch, Morgan Stanley and UBS are among the foreign investors that have sold big time in India, sources said.

“The sharp cut in the fed rate by 75 basis points may slow down the process, but the trend may revive sooner than later as we are not out of the woods,” market observers said. In the immediate future, FIIs are expected to make net investments in India after as they did after the September Fed cut, but it is difficult to hold on, given the current global scenario, they add.

FIIs have sold a net amount of Rs 20,225 crore worth of shares in January. Since Monday they sold shares worth over Rs 7,500 crore. If this trend continues, FIIs may keep on selling, but more slowly after the latest Fed rate cut till the time the sub-prime damages are not totted up, says a fund manager with a leading FII.

The US crisis, which was expected to subside after the December quarter results because global banks had written off nearly $100 billion in losses, has now started spreading to bond insurers, financial intermediaries that protect repayment of principal and interest on bonds. “Some companies have started defaulting, which may have cascading effect on other insurers,” said an investment banker.