For over 19 months now, Foreign Institutional Investors (FIIs) have been reluctant to walk away from the India story. And it's this strong FII presence that has brokerages worried. CNBC-TV18's Nimesh Shah and Kritika Saxena report that given Indian's economic problems and a weak rupee, the risk exposure of the Indian market is rising.
The bulls may be taking a breather, but foreign investors have not let up on investing in the Indian stock markets. Despite slow forward movement on crucial policies, a slowing economy, and a weak rupee, FIIs have spent the last 19 months building up their positions in the country's financial market.
A Citigroup report says FII holding in India is at an all-time high, with exposure levels to Indian equities crossing USD 220 billion. This means these investors hold nearly 48 percent of the market's free-float. But it is this high exposure that has brokerages worried.
The last two months have already seen some FIIs selling equities worth around USD 3 billion. And Citi feels that any reversal in global liquidity could make this outflow the tip of the iceberg.
CLSA, in its note, has said, “With current FII holding at an all-time high of 22.4 percent, the risk appears on the downside given the global backdrop and the concerns on INR and potential more tightening by the RBI.”
Experts say that since the US Federal Reserve announced it would look at reducing liquidity in its system, money has already begun moving from emerging markets to developed markets, but the pace is not alarming.
Jitendra Sriram, managing director and head-research, HSBC India says, “Within the BRIC space, India still looks reasonably okay. I am not seeing that kind of an exodus scenario but yes the pace has slowed down and the trouble is that India's current account deficit (CAD) which is a structural problem requires USD 300-340 million of capital inflows everyday and flows are nowhere close to that today.
Brokerages feel sectors like banking, automobiles, consumer staples and cement, which FIIs have shown a particular preference for are at biggest risk should the tide turn.
Some say this has started as the Bank Nifty has dropped over 14 percent over the last couple of weeks.
Nirmal Jain, chairman, IIFL says, “One important feature of FII investments in last three to four years and therefore their holdings at this point of time - they are mostly concentrated on FMCG, Pharma, IT and a little bit in private sector banks and NBFCs. In last few weeks they have sort of exited atleast part of their holdings in private banks and NBFCs. Now they are looking even at FMCG to lighten their portfolios.”
But brokerages say the only silver lining is that there may be no exodus, because FIIs know the Indian market can only absorb between USD 4-5 billion in outflows, given that there is no buying support from domestic funds