Rest easy, FIIs cannot afford to shun India

The foreign institutional investors (FIIs) have sold equities worth close to Rs 10,000 crore in the domestic markets this month so far. Consequently, we heard many saying in the markets that "the FIIs are shunning India". Out of over Rs 94,000 crore of net investments till date in 2015, the FIIs have taken out little less than Rs 10,000 crore in this month. The current market value of the cumulative investment of FIIs stands at a whopping level of about Rs 19 lakh crore. The net outflow from the FIIs this month is mere 0.5% of the total value of their cumulative equity investments in the country. First of all, FIIs selling $2 or $3 billion worth of Indian equities is quite common fact even during the years of robust inflows. Hence, such small selling shouldn't be construed as "FIIs shunning India".

Yes, their outflows dictate the course of behaviour of Indian equities. But the hard truth is that while the domestic investors have to fear for their outflows, it is equally fearful for the FIIs to think of taking out their investments from India in a big way. Indian equity market doesn't have depth on its own. During 2008-2009, the FIIs sold domestic equities worth over $12 billion and, the Sensex fell 62% to around 8,200 from its peak of 21,000. The FIIs panicked and took back dollars post-Lehman Brothers crisis, which originated in their developed region, not from India. It was like people moving away from relatively strong building to taking shelter under shaking buildings. India was one of a few economies that avoided de-growth in GDP on quarterly or annual basis during the post-Lehman crisis.

The FIIs brought in additionally about $78 billion into the domestic equity markets after the Lehman crisis. The market value of their cumulative investments today stands at over $300 billion (about Rs 19 lakh crore). In terms of free-float, today the FIIs control over 45% of the Sensex stocks and 14% of all NSE listed stocks (including hundreds of midcap stocks).

Roughly about 12% withdrawal from a much smaller base of their cumulative investments brought down the markets by 62% during 2008-09. Now any large-scale selling (even to the extent of 5% of their total holdings i.e. about $15 billion) would erode their investment value steeply. While the promoters of the companies and the insurance companies would remain long-term investors, the FIIs would be hit on both accounts – fall in equities and also in rupee exchange rate as well. Hence, the foreign investors would equally fear along with the retail investors for exiting the Indian equity market, which has also given them many exciting wealth creation opportunities.