For the second time in recent memory, a major brokerage house has questioned the source of foreign institutional inflows into India.
For the second time in recent memory, a major brokerage house has questioned the source of foreign institutional inflows into India.
Foreign brokerage house BNP Paribas Securities report has raised a quizzical eyebrow at record inflows during a time of downward revision in growth estimates, higher inflation and deficient monsoons.
In October 2011, a Kotak Institutional Equities report had raised questions on India’s FII flows and exports.
In 2012, FIIs have pumped in $10.7 billion (Rs59,000 crore) into India, which on a year-to-date basis is ‘higher even than the heady days of 2007 or 2010,’ wrote Manishi Raychaudhuri and Gautam Mehta of BNP Paribas in a report last Friday.
Much of the money came from sources which are not tracked by organisations such as EPFR, which collate data on international investing.
“Almost half of the flows seem to have come from ‘other’, i.e, unexplained sources – comprising sovereign wealth funds, sector funds, hedge funds, etc. This could lend credence to the oft-repeated conspiracy theory that a lot of FII flows into India are, in reality, Indian money disguised as FII money,” Raychaudhuri and Mehta said.
Funds with a mandate to invest in Asian countries excluding Japan or Asia ex-Japan funds, and global emerging markets (GEM) funds have also contributed around 50% of inflows.
This is in spite of the fact that Asia ex Japan funds lost $4.4 billion (`24,323 crore) in investor money due to withdrawals or outflows.
GEM funds had inflows of $15.3 billion (Rs84,000 crore) in 2012 but have pumped in 11% of incremental inflows in India against India’s benchmark weight of 6.9%.
India’s share of FII inflows into major Asian markets has been 62% compared with the historical norm of 25%.
“…The magnitude of FII inflows into India is indeed befuddling. Put differently, what are AxJ and GEM funds seeing in India – given that they have increased exposure to India both in absolute terms and in relative terms – that we don’t?” questioned the report.
Also, interesting is a change in FII tendency to buy heavily when the going is good for its Asian and Emerging Market peers and sell hard when the situation turns. During April- June 2012, when FIIs sold every other market in Asia, they didn’t sell India, noted the report.
One fund manager that DNA spoke with, who manages an offshore fund with foreign investors, expressed surprise at the overall figure but also suggested a more benign explanation.
“A lot of India-dedicated funds could have seen selling due to currency depreciation adding to their woes. Meanwhile, funds with a broader mandate which haven’t seen the same fall, could sense opportunity in investing at lows. That said…the figure does seem on the higher side,” said the person preferring not to be named.
BNP also suggests that there may be less sinister explanations to the inflows-suggesting that earnings stability could have made India more attractive.
The brokerage noted that India seems less likely to face further earnings downgrades even while it has fallen 7-10% for other Asian countries in recent times.
They could also have been less reluctant to sell, because they were largely invested in defensive sectors, suggested the report leading to a larger net buying figure.
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