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Foreign buying does not mean rally anymore
Foreign institutional investors have been net buyers to the tune of $ 10bn in Indian equities since January 2013, according to the data from Securities and Exchange Board of India. Yet, the S&P BSE Sensex shed close to 4% in value.
In the past, Meaningful minutes highlighted that benchmark indices moved in tandem with FII flows. More the FII flows, higher the Sensex value or vice versa.
In 2013, a different picture has emerged so far. The direct correlation between foreign flows and Sensex movement no longer exists.
Here are some pointers to why this is the case:
Local investors selling:Domestic institutional investors have been aggressive net sellers. These include mutual funds and insurance companies. They sold close to $ 6bn worth of shares. This indicates that despite a bullish outlook of foreign investors, local investors do not see better prospects for Indian equities.
Intensity of domestic selling high:The intensity of selling by domestic mutual funds has increased. This is reflected in the monthly trading activity. The net buying or selling activity of domestic funds was usually half of that of FIIs. So, for example, when foreign funds bought shares worth $ 200m, local would sell $ 40m worth of shares or vice versa. This difference has narrowed down in 2013. The activity in three months to March 2013 indicates that local funds are selling as much as FIIs are buying. This is perhaps a key reason why benchmark indices are not moving decisively in one direction.
FII also buying into new issues:FIIs have invested close to $ 1.9bn in 2013 so far into new issue of shares, according to Sebi data. The primary market has witnessed offerings of close to $ 4.3bn from private and state-owned companies in 2013 so far, according to a report in the Business Standard. If one takes out FII flows into the primary market, the net FII buying for 2013 is not significantly higher than the selling by domestic institutional investors.
What next:Investors do not like economic or political uncertainty. India goes to polls in 2014. Over the next 12 to 14 months, investors would look for the government’s ability to push economic growth up. Prospects for a higher economic growth are necessary for Indian companies to pursue expansion of business. The selling by domestic mutual funds suggests that retail investors in India prefer to keep money in bank deposits or gold.
The total value of foreign institutional investor ownership of Indian shares listed on stock exchanges is $ 136bn, according to data from Securities and Exchange Board of India. To put things in perspective, the free-float market cap of the S&P BSE 500 index is $ 498bn. This is total value of shares that are available for trading and not held by promoters for the S&P BSE 500 index. FIIs control 25% of the total value of shares available for trading.