FIIs may not flee despite downgrade $-boost

Foreign institutional investors (FIIs) are unlikely to hit the sell button on their India holdings following Standard & Poor’s downgrade of nine European nations including France last Friday.

While the downgrade may cause capital to move towards the dollar and push it up against other currencies, the resultant weakness in the rupee would deepen the losses for FIIs and make it unattractive for them to sell Indian equities, say experts.

V K Sharma, head of private broking and wealth management at HDFC Securities said the debt markets already factored in the downgrade with France’s 10-year government bond yield trading at almost 1.5-2% higher than Germany’s despite both of them having same AAA rating before the event.

“The only impact we may see is some profit booking by investors as the stock futures position this month were almost double that seen in December. Also, with euro getting weaker against US dollar, the rupee, which has been gaining traction, would now see some loss,” he said.

A foreign institutional investor DNA spoke with suggested that a depreciating rupee would act as a disincentive against selling existing holdings.

“In a case where there is depreciation of the rupee further investments may slow for fear of more downside, but typically the chance of selling at a loss diminishes,” said the person on condition of anonymity.

The highest FII holding is in the information technology sector, where they hold an average stake of 22.86% across 30 software and hardware companies.

Next in line is the automobiles sector, where they hold an average of 16.44% stake across ten companies.

Pharmaceutical and healthcare companies have an average FII stake of 15.99%, across 31 companies.

Banks, realty, fast moving consumer goods and non-ferrous metals have an average stake of between 10-16%.

DNA Money has considered holdings in companies which are part of the BSE 500 index representing nearly 93% of the total value of all companies list on the BSE.

The downgrade would not have a major impact on the market, said Raamdeo Agrawal,joint managing director at Motilal Oswal Financial Services.

“It is not catastrophic, though there would be some negative impact on equities and especially the currency market,” he said. The rupee depreciated 18.68% during 2011, closing at 53.10 on December 30. Foreign institutional investors were net sellers by Rs3,417.7 crore in 2011 after being net buyers by Rs1.36 lakh crore in 2010.

The rupee has appreciated 3.22% since, and closed at Rs51.44 on Friday. Foreign institutional investors have been net buyers by Rs2,558.80 crore in January.

The BSE’s Sensex, whose movements are said to represent the overall market, has gained 4.53% in 2012. It closed at 16154.62 on Friday after having lost 24.64% in 2011.

Recent developments in Greece are also likely to be a drag on sentiment, according to Sharma.

“The bigger market risk is from Greece default as the talks between government and creditors have broken down on Friday. This coupled with downgrades is the major negative news post Christmas and to that effect, the investor sentiments may be hit,” he said.