FIIs pull out Rs 1300 cr in 3 weeks

FIIs pull out Rs 1300 cr in 3 weeks
George Mathew

MUMBAI, JULY 23: It seems to be a `quit India' time for foreign investors. The intensity of selling by foreign institutional investors (FIIs) has taken the stock markets for a surprise. They have pulled out as much as Rs 1,300 crore from India in the last three weeks. This is one reason for the sustained pressure on the rupee which slumped against the dollar last week.

With FIIs leading the bear rally, the benchmark Sensex fell by a whopping 393 points last week and the continuing weak sentiment is likely to pull down the markets further. The hike in bank rate and cash reserve ratio will spoil the show in the short-term as the move is likely to have wide ranging implications. As interest rates are likely to move up, the bottom lines of corporates will be under pressure and there will be more uncertainty on the rate front. Economists are already talking of ``lesser money chasing higher demand'' and demand-led inflation.

The rupee has depreciated by 3.5 per cent to 45.02 since the start of the year against the US dollar. ``In our view, it is likely that the dollar demand is genuine and not speculative. The drop in foreign exchange reserves in excess of Rs 3,500 crore since April 2000, FDI slowdown and net FII outflows during the last two months may have prompted the RBI to press the panic button,'' said a review by Credence Analytics.

The total FII outflows in June and July of this year amount to Rs 2,234 crore. Although this is not a big fall as there is still a net investment of over Rs 5,000 crore this year, market pundits are worried and FII circles term it as normal market operations. As a seasoned fund manager pointed out, there were valid reasons earlier for FIIs to withdraw funds. While the nuclear blast in Pokhran and the subsequent downgrading of India prompted FIIs to pull out funds, election uncertainty last year forced FIIs to skip India.

The developments in the last two or three weeks have now created a vicious cycle. First, a combination of factors including FII selling pulled down the rupee and then the RBI stepped in to arrest the rupee fall. The impact of the RBI measures will definitely put a burden on corporates. Even the government, the largest borrower in the market, will find the going tough. The government has completed only 40 per cent of its borrowings -- as against 55 per cent in the same period of last year -- in a year that is set to see a rise in market borrowings.

Any rise in interest rates will be an additional burden for the government as well. It has only recently reduced the interest rate on employees provident fund in a bid to reduce the interest burden. Overall, there will be a major drop in capital flows. FDI inflow into the country grew by over 23 per cent in the first five months of 2000 to $1.73 billion as against $1.4 billion in the corresponding period the previous year. ``If the capital market remains in doldrums and FII inflows drop, even FDI inflows will also slacken,'' said an analyst.

The bellweather Sensex has already fallen below the 4,500 mark to 4,463.66 -- a drop of over 600 points in the last ten days. The dampener of political uncertainty has the potential to exacerbate the already parlous situation. The million dollar question is: will FIIs take Sensex back to the 4,000 level once again? They are unlikely to take a charitable view on Indian markets.