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S. Vaidya Nathan

INVESTMENTS by foreign institutional investors in 2002 are set to be the lowest in the ten years that FIIs have been investing in the stock market. There is only one exception: 1998, when the FIIs were net sellers to the extent of $163.5 million. But 1998 was not exactly a `normal' year. Factors such as the Pokhran nuclear tests, which triggered massive outflows and the outbreak of the South-East Asian economic crisis, were factors behind the outflows.

In all the other years to date, FII flows have been in the positive territory (that is, their purchases higher than sales). In these `normal' years — those without any external shocks — the FIIs are set to close 2002 with their lowest level of interest.

The sharp sell-off in September so far — around $126 million — has made that almost a certainty. For the year, FII net inflows now stand at $464.9 million. To get the next highest number, one would have to go as far back as 1993 — the first year of FII investing in the stock market — when they were net investors to the tune of $ 827.3 million. In all other years, the FII inflows have been in excess of $1 billion and averaged around $ 1,500 million. Compared to 2001, which was a good year in terms of FII flows, the flows to date in 2002 are almost $ 1 billion lower. To some extent, this may explain the drift of the market.

Behind the insipid trends in 2002 may lie global concerns as well as those specific to India. Quite a few prominent FIIs have been pulling out of emerging markets or scaling down investments in them. For instance, a number of FIIs, such as Pioneer, Dundee, Jardine Fleming, Newton, have dropped out of mutual fund operations in India.

This does not mean they have scaled back their investments as FIIs. But it does point to relatively less interest in the Indian market. A few FIIs have also opted out of the Indian markets completely. More important than these may be the fact that the FIIs are taking a beating in the more established markets such as the US, Europe, and the never-ending sob story, Japan.

These declines would have dented their portfolio values as well as asset allocation patterns to various sectors and countries. This factor would also have necessitated a readjustment of their exposure to emerging markets. The overall weakness in the US market may have to end before the FIIs feel confident about ploughing more funds into other markets.

Is there a possibility of FII flows perking up in the remaining three months of 2002 and lifting the net inflows beyond the $ 1 billion level? This seems unlikely given the turmoil these investors face across stocks markets around the globe.

The fact that the FIIs have sold sizeably in September despite the low level of equity prices and the improvement in the economic conditions suggests that pressures are intense to cut down exposures. The inferior relative stock performance in India may also be a factor at play. But, in this particular context, notable is that this did not deter the FIIs from making sizeable commitments to Indian equities in the past.

There is also the possibility that the setback to the disinvestment process is being viewed negatively. The postponement of the disinvestment programme in Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) may have been irksome because institutional investors had got into these stocks in a big way hoping to capitalise on disinvestments-induced open offer.

A break-out of the September kind on the outflow side was almost inevitable, given that the FIIs barely made positive moves after the first two months when the inflows were sizeable. Since then they have been trading avidly and yet the monthly net inflows remained at very modest levels.

Even if the outflow of the September kind does not happe, the activity may resemble the pattern of the preceding months in 2002 with modest inflows. This would mean the FII inflows would close 2002 almost certainly at their lowest levels in 10 years (without considering the abnormal 1998). So expect no trigger to liquidity and stock prices from the FIIs for some months to come.

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