Fund inflows near 3-year high, and flowing

Fund flows into India have hit the highest level in nearly three years on the back of strong global liquidity and higher allocation to emerging market equities.

In fact, according to data from EPFR Global, which tracks fund flows and asset allocations worldwide, strong flows into India have helped the Asia ex-Japan equity funds register their best weekly inflows in over 15 months.

“Inflows into Asia have been targeting India and China. Of the $1,613 million inflows to all Asian dedicated funds, 36% went to Asia ex-Japan regional funds, 28% to China, and 19% to India,” Markus Rosgen, Kelly Kwok and Yue Hin Pong, analysts at Citigroup Global Markets said in their weekly equity strategy report dated September 24, 2010.

Indian markets have been a huge beneficiary of increased flows in the last two weeks. As per Sebi data, foreign institutional investors (FIIs) have pumped in $1,888 million (`8,618 crore) last week on the back of $2,070 million (`9,579 crore) inflows in the week ended September 17.

In fact, these have been the highest weekly inflows since the week ended October 12, 2007 when FIIs had bought equities worth $2,194 million.

“Foreign investors have been increasing their weightage on India on the back of strong domestic economic growth. It appears that some of global asset funds, which were underweight on emerging economies like India, have also shifted their allocation towards India,” Anish Damania, business head- institutional equities at Emkay Global Financial Services, said.

Going by experts, the swift rise in benchmark indices has led to arbitrage opportunities, which is also drawing more money into cash market. For the last few sessions, Nifty futures have been trading at a constant premium to the spot index.

“There’s carry advantage in the markets currently, with FIIs buying in cash market, while selling is seen in next month’s futures,” said Piyush Garg, CIO, ICICI Securities.

But India is not the sole beneficiary of strong liquidity. Foreign funds continue to prefer emerging market equities as they poured in close to $3.4 billion in the week ended September 22.

“This represents the 17th consecutive week of inflows, amounting to 6.2% of AUM cumulatively. This compares with the longest consecutive inflows of 23 weeks and the biggest cumulative amount of 14% in history. In contrast, global equity funds have seen quite consistent outflows over the past 14 weeks,” said the Citigroup analysts.

Experts do not see any major correction for the Indian markets unless there is a major upheaval on the global front.

“As long as global sentiments and flows remain positive, there is no trend reversal seen. Though there are fatigue signs seen in the last 2-3 days with longs being unwound in index futures and selling in stock futures, the markets seem to have strong support at 5900 in the immediate term,” said Garg.