The selling pressure by FIIs is likely to continue in the near term, with leading foreign funds advising clients to hold back investments into India.
MUMBAI: Foreign institutional investors have pulled out over Rs 17,000 crore, or $2.9 billion, from the Indian equity markets in June and July, the biggest two-month sell-off in nearly five years, data from the stock exchanges show.
The selling pressure by FIIs is likely to continue in the near term, with leading foreign funds advising clients to hold back investments into India as there are not enough compelling reasons to buy Indian stocks. FIIs had pumped in nearly $40 billion in the 17 months to May 2013.
Global fund managers have cited several reasons to avoid Indian equities: slowdown in economic growth, possibility of sovereign ratings downgrade, rising fiscal and current account deficit (CAD), depreciating currency, uncertainty over interest-rate cuts and big-ticket reforms taking off and political uncertainty due to the upcoming elections.
"The rupee weakness against the dollar is a paramount issue at this point of time, and the central bank's move to curb liquidity and add pressure on interest rates will not help address the currency issue," said Gopal Agarwal, chief investment officer at Mirae Asset Global Investments. "We need long-term measures such as manufacturing and export policy for stabilisation of currency."
The Reserve Bank of India has reduced its growth forecast for this fiscal to 5.5% from 5.7% earlier. Some analysts feel growth may slip further as manufacturing data continues to disappoint. Bolstering this view is the industrial output data for May that showed a 1.6% contraction.
The recent liquidity tightening measures taken by RBI to stem currency decline has put immense pressure on corporate debt, threatening creditworthiness of many business houses.
Foreign investors are worried about India's current account deficit, which many expect to hover around 4.5% this fiscal due to the sharp fall in the rupee, slowdown in exports, and rise in the country's import bill.
"The current equity market situation is looking pretty tough. There is not much investor interest in equity markets, as the negative headlines are keeping investors at bay. The concern over rising current account deficit is a dampener to investor sentiment," said Anand Shah, chief investment officer at BNP Paribas BSE -3.46 % MF.
Experts say the external situation can weigh heavy on India's economy and markets. Going forward, the US Federal Reserve may taper its $85-billion bond-buying programme, and this will continue to weigh on emerging markets this year. Fund managers say this may make it difficult for the RBI to roll back liquidity measures in the near term, particularly in a scenario where current account deficit may not have moved in the desired direction.
"We expect a long-drawn-out economic recovery. The structural reforms can only take us out of the woods, as the weak investment cycle is held back by cost overruns, high leverage, deteriorating cash flows and eroding asset quality," said Leif Lybecker Eskesen, chief economist - India & ASEAN at HSBC, in a note.
General elections in the country are less than a year away, and many FIIs see this as a major risk to investments, as no national party is seen emerging with a clear mandate. Some fear FII flows will remain tepid till elections are over.
The selling pressure by FIIs is likely to continue in the near term, with leading foreign funds advising clients to hold back investments into India as there are not enough compelling reasons to buy Indian stocks. FIIs had pumped in nearly $40 billion in the 17 months to May 2013.
Global fund managers have cited several reasons to avoid Indian equities: slowdown in economic growth, possibility of sovereign ratings downgrade, rising fiscal and current account deficit (CAD), depreciating currency, uncertainty over interest-rate cuts and big-ticket reforms taking off and political uncertainty due to the upcoming elections.
"The rupee weakness against the dollar is a paramount issue at this point of time, and the central bank's move to curb liquidity and add pressure on interest rates will not help address the currency issue," said Gopal Agarwal, chief investment officer at Mirae Asset Global Investments. "We need long-term measures such as manufacturing and export policy for stabilisation of currency."
The Reserve Bank of India has reduced its growth forecast for this fiscal to 5.5% from 5.7% earlier. Some analysts feel growth may slip further as manufacturing data continues to disappoint. Bolstering this view is the industrial output data for May that showed a 1.6% contraction.
The recent liquidity tightening measures taken by RBI to stem currency decline has put immense pressure on corporate debt, threatening creditworthiness of many business houses.
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Foreign investors are worried about India's current account deficit, which many expect to hover around 4.5% this fiscal due to the sharp fall in the rupee, slowdown in exports, and rise in the country's import bill.
"The current equity market situation is looking pretty tough. There is not much investor interest in equity markets, as the negative headlines are keeping investors at bay. The concern over rising current account deficit is a dampener to investor sentiment," said Anand Shah, chief investment officer at BNP Paribas BSE -3.46 % MF.
Experts say the external situation can weigh heavy on India's economy and markets. Going forward, the US Federal Reserve may taper its $85-billion bond-buying programme, and this will continue to weigh on emerging markets this year. Fund managers say this may make it difficult for the RBI to roll back liquidity measures in the near term, particularly in a scenario where current account deficit may not have moved in the desired direction.
"We expect a long-drawn-out economic recovery. The structural reforms can only take us out of the woods, as the weak investment cycle is held back by cost overruns, high leverage, deteriorating cash flows and eroding asset quality," said Leif Lybecker Eskesen, chief economist - India & ASEAN at HSBC, in a note.
General elections in the country are less than a year away, and many FIIs see this as a major risk to investments, as no national party is seen emerging with a clear mandate. Some fear FII flows will remain tepid till elections are over.
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