Search the Internet          Tips  Sites: Finance, Investment

Foreign fund inflows into India seen dwindling

Once bitten, twice shy.

That's even truer of investing than of love, a point made by analysts in forecasting a decline in foreign investment in Indian stocks over the second half of 2001.

Foreign investors pumped $2.4 billion into Indian stocks over the first half of the year, a record for the period.

Yet for most that had to be a wrong way bet. The Bombay Stock Exchange benchmark index sank 13 per cent over the first half of the year, making the Indian market the second worst performer in Asia during the period.

"We don't expect this rapid pace to continue," said Jeff Chowdhury, director of F&C Emerging Market in London, which has $250 million invested in Indian assets. "There are more attractive opportunities available around the world."

OPPORTUNITIES ELSEWHERE

Because of its large domestic economy and low reliance on international trade, India was seen as a safe investment destination in the first half of the year.

Other export-driven emerging markets were losing strength due to the US slowdown.

But now, given expectations the US economy and corporate earnings there may soon pick up, analysts say portfolio funds will increasingly find their way into developed markets.

"The problems in Argentina and pressure on currencies across emerging markets is creating the view that markets like India are no longer safe havens. Asset managers have begun talking about reallocation to OECD and G-7 countries," said Ketan Desai, fund manager at Bahrain-based TAIB Everest Fund, which has more than $80 million invested in India.

NET OUTFLOWS

Domestic factors too are likely to cause foreign investment in Indian share markets to drop.

"Given the backdrop of reduced liquidity in the domestic market, we could see some foreign funds leaving the country," said Anand Radhakrishnan, fund manager at Madras-based Sundaram Newton Asset Management Company.

Volumes in India's stock markets in July have dropped at times to one-fifth the levels in the first quarter as new rules imposed to curtail volatility staunched speculative trading.

From July the Securities and Exchange Board of India (Sebi) banned carryforward trading, which at one point accounted for 90 per cent of trading volumes across the country's 23 exchanges.

Sebi also more than doubled to 414 the number of stocks subject to rolling settlement, further reducing the scope for speculation. Trades in those stocks, which account for more than 80 per cent of turnover, must be closed at the end of each day.

As a result, volumes have dropped to a little as 30 million a day, compared to 150 million or more before Sebi moved to crack down on speculative trading.

Foreign funds tend to reduce exposure to markets where volume is declining because a drop in turnover often is accompanied by a downturn in share prices.

Also dwindling liquidity makes it more difficult for institutional investors to operate efficiently: to accumulate a substantial holding in a preferred stock without driving the price up, or to sell off a major holding without driving the price down in the process.

Foreign investors are only allowed to invest in the Indian share market through approved funds, not as individuals.

UTI FACTOR

Weak volumes are even more of a threat now because of the problems faced by the Unit Trust of India, the largest mutual fund manager.

Earlier this month UTI, the single largest investor in the Indian equity market, suspended redemptions for the remainder of the year from its largest fund.

UTI controls around Rs 600 billion ($12.7 billion), with a quarter of that invested through its largest fund, in which 20 million investors own units.

On Sunday, UTI announced all US-64 investors will be allowed to sell up to 3,000 units from August 1 to May 2003.

"Adequate liquidity arrangements have been made to ensure that any funds needed for redemption will be available without UTI having to resort to a large-scale sale of investments in the market," a UTI statement said.

Yet UTI Executive Director B G Daga said: "One of the options for raising funds could be strategic sale of equity."

The possibility that UTI may begin to sell large blocks of shares to raise cash needed to meet redemptions has put Indian share markets on edge in recent weeks.

DOMESTIC FACTORS

A marked slowdown in India's economic growth rate highlights another list of domestic factors which is expected to cause foreign portfolio investment inflows to drop.

Growth in gross domestic product for the year ended March is now estimated at 5.2 per cent, down from earlier estimates of six per cent.

And since March growth in industrial output has slowed further. Industrial output in April-May was up just 2.6 per cent from a year earlier.

Manufacturing remains weak as industries, saddled with excess capacities, have curtailed capital spending and low consumer demand has depressed prices, forcing companies to cut costs.

Tell us what you think of this report